Tax Guide to Cryptocurrency

The IRS now considers cryptocurrency to be property, and any losses, gains, or income earned from participating in crypto activities need to be reported on Schedule D and Form 8949, of your personal income tax return. Here is a cryptocurrency guide to help you understand this.

If you buy, sell, exchange, or spend crypto, you’ll realize capital gains or losses. Similar to other investments taxed by the IRS, your gain may be short-term or long-term, depending on how long you held the cryptocurrency before selling or exchanging it. If you owned the cryptocurrency for one year or less before spending or selling it, any profits are typically considered short-term capital gains, which are taxed at your ordinary income tax rate. However, if you held the cryptocurrency for more than one year, any profits are typically long-term capital gains, and are subject to long-term capital gains tax rates.

How you report cryptocurrency on your tax return depends on a couple of things: how you got it and how you used it.

Crypto Tax Rates

When you buy and sell capital assets, your gains and losses fall into two categories: long-term and short-term. How the IRS treats these two categories is very different in terms of the tax consequences you’ll encounter.

1. Short-term capital gains and losses come from the sale of property that you held for one year or less. These gains are typically taxed as ordinary income at a up to 37% for the 2022 tax year.
2. Long-term capital gains and losses come from the sale of property that you held for more than one year and are typically taxed at preferential long-term capital gains rates of 0%, 15%, or 20% for the 2022 tax year depending on your level of income.

You will need to calculate your capital gains and losses, CKH Group is here to help you, feel free to reach out to us to book a free consultation to discuss your needs.

Buying or selling cryptocurrency as an investment

Buying cryptocurrency is not considered a taxable event by itself. You can choose to buy and hold cryptocurrency for as long as you like without paying taxes on it, even if the value of your position increases.

However, taxes are due when you sell, trade, or dispose of your cryptocurrency investments in any way that causes a gain in your taxable accounts. This doesn’t apply if you trade cryptocurrency in a tax-deferred or tax-free account like an individual retirement account (IRA).

If you mine cryptocurrency

Cryptocurrency mining refers to solving cryptographic functions to validate and add cryptocurrency transactions to a blockchain. In exchange for this work, miners receive cryptocurrency as a reward.

If you earn cryptocurrency by mining it, it is considered taxable income and may need to be reported on Form 1099-NEC at the fair market value of the cryptocurrency on the day you received it. You need to keep track and report this even if you don’t receive a 1099 form, as the IRS considers this taxable income.

If you receive cryptocurrency as payment for goods or services

Many businesses now accept Bitcoin and other cryptocurrency payments. If someone pays you using cryptocurrency in exchange for goods or services, the payment counts as taxable income, just as if they’d paid you using cash, check, or credit card. For tax reporting, the dollar value that you receive for goods or services is equal to the fair market value of the cryptocurrency on the day and time you received it.

If you sell or spend cryptocurrency

If you mine, buy, or receive cryptocurrency and eventually sell or spend it, you have a capital transaction resulting in a gain or loss just as you would if you sold shares of stock. This is where cryptocurrency taxes tend to get more involved.

For example, let’s look at a scenario for buying cryptocurrency that appreciates in value and then is used to purchase concert tickets. The example will involve paying ordinary income taxes and capital gains tax.

• First, you receive $200 worth of the cryptocurrency in exchange for services on January 15th.
• Six months later, on July 15, the fair market value of your cryptocurrency has increased to $500, and you use it to buy tickets for a concert.
• On your tax return for that year, you should report $200 of ordinary income for receiving the cryptocurrency in January and a short-term capital gain of $300. That’s the $500 value of your crypto when you purchased the tickets, minus your $200 basis when you received the crypto.

When you calculate your basis in the cryptocurrency for capital gains tax, you need to account for the ordinary income tax you already paid on the original $200 in value from January 15. That same crypto position, now worth $500, gets used to purchase the tickets, meaning you wouldn’t need to pay capital gains tax on the original $200.

If you had paid capital gains tax on the full $500, the initial $200 would have been taxed twice: once as ordinary income and once as a capital gain. Therefore, you subtract your original $200 basis from the $500 balance.

Those two cryptocurrency transactions are easy enough to track. But imagine you purchase $1,000 worth of crypto, load it onto a cryptocurrency debit card, and spend it over several months on coffee, groceries, lunches, and more.

If, like most taxpayers, you think of cryptocurrency as a cash alternative and you aren’t keeping track of capital gains and losses for each of these transactions, it can be tough to unpack at the year-end. Staying on top of these transactions is important for your tax reporting purposes.

If you exchange one type of cryptocurrency for another

Cryptocurrency investors often exchange or trade one type of cryptocurrency for another. For example, say you have $1,000 worth of Bitcoin and exchange it for $1,000 worth of Ethereum. If you originally paid $300 for the Bitcoin, you must recognize a $700 capital gain when you make the exchange. You established a $300 basis at the time of purchase for your original Bitcoin position but recognized a $700 capital gain because of the coin’s appreciation between your purchase and the exchange for Ethereum. Your Ethereum’s basis is its fair market value at the time of exchange, making your new cost basis $1,000 after paying the $700 capital gain on the exchange.

Are there any tax-free crypto transactions?

You can make tax-free crypto transactions under certain situations, depending on the transaction you make, the account you transact in, your income, and filing status.

Buying cryptocurrency doesn’t create a taxable event even if the crypto’s value increases over time. Buying and holding doesn’t result in a tax consequence until you decide to sell or exchange the cryptocurrency.

For crypto transactions you make in a tax-deferred or tax-free account, like a Traditional or Roth IRA, these transactions don’t get taxed like they would in a standard bank account.

You can also avoid paying taxes on long-term capital gains recognized by selling your cryptocurrency if it is your only capital gain and your income is less than or equal to $40,400 if you file as a single person or as married filing separately, or if your taxable income is less than or equal to $80,800 if you file jointly as a married couple.

Be sure to keep records of your crypto transactions

The IRS is stepping up their enforcement of cryptocurrency tax reporting as these virtual currencies grow in popularity. As a result, you will need to keep track of your crypto activity and report this information to the IRS on the appropriate tax forms. You may wish to use software designed to help you track your transactions. This process can become confusing and complex, however, CKH Group is here to help you. As always if you have any questions, CKH Group is here for you! Reach out and let’s chat, you can book a free online consultation here, or you can contact us at  +17704959077 or email us at info@ckhgroup.com

The above article only intends to provide general financial information and is based on open-source facts, it is not designed to provide specific advice or recommendations for any individual. It does not give personalized tax, financial, or other business and professional advice. Before taking any form of action, you should consult a financial professional who understands your particular situation. CKH Group will not be held liable for any harm/errors/claims arising from the articles. Whilst every effort has been taken to ensure the accuracy of the contents we will not be held accountable for any changes that are beyond our control.