Cryptocurrency taxation & how crypto is taxed

Do crypto gains count as income, and should they be reported on a tax return?

Mostly yes, but sometimes no. There are thousands of different types of cryptocurrencies (virtual currencies) – like Bitcoin, Ethereum, Tether, and Dogecoin – and they all are considered a capital asset (like stocks and other investments), even though they are solely digital in nature. Because the IRS considers crypto to be property, like stocks, bonds, and real estate, it is subject to taxes when you sell or trade it at a profit or earn it. Thus, the IRS requires it to be reported on a federal income tax return.

You do not have to report crypto activity if you simply purchased and held it. 

But, if you had earnings from your crypto investments from gains on sale or trades, or you were paid in crypto, they need to be reported as income. If you lost on the sale of your crypto investment, you might be able to take a tax deduction. 

Bottom line: you must report all cryptocurrency-related income, gains, and losses on your income tax return. This is true even if the transaction value is low or not material in your mind because that has no bearing on IRS reporting requirements.

What are the crypto tax rates for transactions?

Tax rates for cryptocurrency earnings depend on how much income you received and how long you owned your digital assets.

For example, if you owned your digital asset for less than a year before selling or exchanging it, you have a short-term capital gain or loss. You’ll pay the same tax rate as on that of your ordinary taxable income, which can range from 10% to 37%, depending on your income level.

But, if you sell, trade, or withdraw digital assets that you have held continuously for longer than a year, this is a long-term capital gain or loss. Capital gains rates are 0%, 15%, or 20%, depending on your taxable income amount. Long-term capital gains on crypto are taxed at the same rate as other capital gains investments.

When are the reportable and potentially taxable events in crypto, and how much tax do you pay on crypto activity?

Many people wrongly believe that their crypto investments are only taxable, and should only be included on a tax return, when they have “cash” in hand. That’s perhaps the biggest misunderstanding in crypto and taxes. It is just not true. With cryptocurrency, it’s all about the transaction of converting the crypto. This happens during trading, as well as converting from one cryptocurrency to another. These are all reportable transactions because they incur either a gain or a loss. Additionally, there might be a “cash out” or disposal of the crypto, but that doesn’t mean there’s not a reportable transaction with a capital gain or loss.

What should I do when I buy, sell, or trade cryptocurrencies?

• When you buy: keep a record of what you bought, how many units you bought, the date you bought it, and how much you paid. Most platforms do this automatically for you, but there are many options and configurations to set and understand so you can follow and ultimately use your data for tax reporting.
• When you sell: use the information in your records, on your basis, or investment, in the asset to determine gains or losses and if you have short- or long-term gains. Long-term gains have lower tax rates than short-term gains.
• When you trade: you have two transactions. The sale of what you have and the purchase of new assets. Keep information on all transactions.

What should I do when I mine, stake, or receive crypto as income?

• When you’re mining: anything you find is business income and taxed as such.
• When you’re staking: the value of your stakes is taxable upon receipt.
• When you sell: the basis is the value when you received the stakes. The sale is a capital gain/loss transaction.
• When you receive digital assets as income: the value when it is transferred to you is your income.

When can I write off crypto losses?

Realized losses can be used to offset profits on your taxable investments, and in some cases even offset regular income. Calculating your gains and losses isn’t difficult. It’s generally the difference in the price you paid for the cryptocurrency and what you sold it for.

Where do I report crypto transactions on my tax return?

The IRS treats cryptocurrencies as property, so you’ll report these transactions using Form 1040, Schedule D, Line 7 for capital gains and losses. You file a Form 8949 with your Schedule D when you need to report additional information for the sale or exchange of your crypto.

If you earn income as an independent contractor and receive payment in digital assets, then you’ll report thie income using Schedule C including it with your tax return. If your profit is $400 or more, you’ll need to use Schedule SE and pay self-employment tax in addition to income tax. If you receive assets as a reward and you are not considered self-employed, then you can report this income on Schedule 1.

In summary, there are many ways to get virtual currency assets, from simple purchase, to earning it, to trading. Each can have a different tax reporting obligation and tax impact. It’s best to work with a tax expert who has experience working with cryptocurrencies.

How do I keep records of my digital assets?

It’s important to keep good records of your finances. Not just for tax purposes, but for every aspect of your life. There are a variety of ways to keep records but do what’s best for you. And do it for all areas of your financial planning and record keeping. Don’t try and keep some records digitally and others on paper – things can get lost or forgotten. Have one system, stick with it, and keep up by regularly updating the records. Many of the crypto platforms keep the data in their system, so it shouldn’t be hard to keep on top of it.

The world of investing in cryptocurrencies can be potentially very profitable, but it is also risky. Related tax law changes are coming, so be sure to watch out for how that will impact your taxes. Changes include Form 1099-DA reporting all digital asset transactions, stablecoin deemed-basis, and wash sale tax treatment but there is so much unknown about the future taxation of cryptocurrencies. Jackson Hewitt strongly recommends not pushing virtual currency aside and leaving it off your tax return, because the IRS is more sophisticated than you might think. Find an office near you and work with a Tax Pro today to learn more.

About the Author

Mark Steber is Senior Vice President and Chief Tax Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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