If you decided to take part in the cryptocurrency revolution, you may have purchased some of your very own crypto and made a profit as the price rose. The problem? Whether you decided to invest your fiat currency into Ethereum, Litecoin, Bitcoin Cash, or other digital assets, these assets are still considered taxable by the IRS, making it so that you owe money once the relevant tax year rolls around.
That being said, many beginner investors who purchased crypto assets may not know anything about their tax liability. If you purchased crypto and engaged in any transactions, let’s dive into how cryptocurrency can impact your taxes.
If you earned cryptocurrency in the form of income, you owe income tax.
Cryptocurrency is typically acquired by making creating an account with a major cryptocurrency exchange like Coinbase and making a purchase of the different cryptocurrencies that you want. This type of transaction does not incur any taxes as there has yet to be a transaction made. However, some may receive cryptocurrency in the form of payment for providing a product or service if they’re a merchant or even if they’re engaging in an activity like crypto mining.
If you receive Bitcoin or altcoins in this capacity, you will need to report this income to the IRS. Fortunately, this will be quite simple to do as you can include this income in your traditional tax return alongside your main income and other money-earning activities. Just make sure that you have access to all the wallets where you receive BTC, XRP, ETH, LTC, or other assets so you know exactly how much you earned over the course of the year!
If you sell, exchange, or spend your cryptocurrency, you’re subject to capital gains taxes.
Cryptocurrency is only treated like fiat under tax law in the United States when it’s being received as income. Otherwise, it’s not treated as currency, but like other tradeable investments such as stocks. For example, let’s imagine that you acquired the best Bitcoin card so that you could engage in transactions with a physical card without having to use funds from your bank account.
Even though you were able to become a cardholder of a crypto debit card or credit card that made it easy for you to spend your funds as though they were your local currency, you’re still selling your crypto for cash to make these transactions. Therefore, every time you spend your cryptocurrency, you’ve engaged in a taxable event.
Whether it’s sold, exchanged for another altcoin, or spent like in the scenario above, you have to report the relevant capital gains or capital losses that come from your trading activity. These types of transactions can be confusing, so it’s important to brush up on your state tax compliance to understand how reporting works and what you need to report to your state.
If you receive digital currency from an airdrop, you’re responsible for the funds you’ve acquired.
Although the guidance is a bit controversial in the crypto community, the IRS does state that funds acquired through airdrops and hard forks are considered income and will need to be reported as such. Hard forks occur when a blockchain splits and a new currency is created. This typically happens when the community can’t reach a uniform consensus and decides to create a new blockchain that follows new rules.
Meanwhile, airdrops are transfers of currency that are often done as a marketing tactic by organizations. Unfortunately, whether or not you want these new coins, you’re still responsible for reporting and paying income taxes.
Crypto has become a hot investment over the past few years, but too many individuals will purchase some of their own assets without fully understanding the tax implications of their actions. If you’ve purchased crypto recently or in the past and want to know what your tax liability is, use the guide above to learn about some of the most crucial points so that you can get the tax support you need!