It’s tax season, and the emergence of digital items and crypto bought and sold on the internet have made filings more complicated than usual. Cryptocurrencies are more mainstream than ever, and the average person probably doesn’t know that they have to report their transactions to the Internal Revenue Service, let alone how to report them. Each individual situation is different, so meeting with a professional accountant is the only way to be sure cryptocurrencies are correctly filed. This guide is not advice; however, it might provide the background information needed to be more informed on the current situation and requirements.
First, it’s important to recognize that cryptocurrencies are not legal tenders in the United States. Since cryptocurrencies are not considered true currency in the U.S. tax system, they’re reported differently than standard income. When a U.S. citizen files their income taxes, they pay a percent of their earnings in USD based on their income bracket. With cryptocurrency, though, the tax system considers the new currency more like a stock or a car than a legal tender. It’s an asset, one that can appreciate or depreciate, and these factors contribute to whether or not cryptocurrency is taxed and the tax rate.
The simplest way that crypto is taxed is when it is sold. When cryptocurrency is sold in the U.S., it is taxable for its fair market value. That means that if on the day the cryptocurrency is sold it is worth a specific amount in USD, that value is taxable income. The IRS provides two forms that are primarily used for the taxation of cryptocurrency: Form 8949 and Form 1010 (Schedule D). Both of these forms are used to report capital gains and losses, which is exactly what the sale of cryptocurrency is considered under U.S. tax law. To fill out these forms, consult with a professional and use the transaction logs found in cryptocurrency marketplace apps, like Coinbase.
Other Taxable Crypto Transactions
Now that many businesses and online retailers are considering cryptocurrency as a form of payment, another taxable event is possible. When someone pays for a good or service with cryptocurrency it is taxable, but not in the way that person might expect. Instead of simply paying a sales tax, like is custom on legal tenders, it is once again necessary to calculate whether the sale is at a loss or a gain. The cryptocurrency is being disposed of in exchange for a good or service at a set market value, and if that market value is higher than what the portion of cryptocurrency was bought for, another capital gain must be reported. Even though it may seem trivial, the IRS can and will take action against people in the U.S. that misrepresent their cryptocurrency gains and losses.
There are some cryptocurrency transactions that are not taxable, like simply holding the cryptocurrency in a wallet. When cryptocurrencies are held, no gains or losses are realized. As such, taxes are not paid on those currencies until they are sold. Similarly, moving cryptocurrency between wallets or accounts is not taxable either. The truth is, each individual type 0f cryptocurrency transaction is treated differently under U.S. tax law, and cryptocurrency holders should consult with an accounting professional before filing their taxes. However, having an understanding of how cryptocurrency is perceived by the IRS — as a capital asset — should make tax season go as smoothly as possible.
