Cash or property?
If you have used or invested in cryptocurrency, such as Bitcoin, the taxes may not be as straightforward as you think.
Taxes are what we know best, and we’re here to walk you through the layers of filing your taxes when owning cryptocurrency.
What is cryptocurrency?
Cryptocurrency is a digital form of money. Each unit is called a coin even though they’re not physical coins. Types of cryptocurrency include bitcoin, ethereum and litecoin. The currency can be used to pay for purchases, invest, or exchange money with someone else. Like international currency, they can also be exchanged for traditional U.S. dollars or other national moneys.
Cryptocurrency and Taxes
The IRS classifies all cryptocurrencies as property, and thus you are required to record it on your tax return and be prepared to pay taxes on it for certain uses.
- Purchasing cryptocurrency: When you first purchase cryptocurrency, you do not have to pay income tax.
- Using cryptocurrency to make a purchase: This is considered a sale of cryptocurrency, as property, even though you’re using it to make the purchase. Using cryptocurrency to make purchases is considered a taxable event. The tax treatment depends on when you acquired the cryptocurrency. If held less than a year it would be considered a short-term capital gain or loss; a year or greater would be considered a long-term capital gain or loss.
- Selling a “lot” of cryptocurrency: If you sell it for more than the value you purchased it for, and held the lot for at least a year, you need to report long-term capital gains. If you sell the cryptocurrency at a loss, it will generate a short-term or long-term capital loss.
- Buying cryptocurrency after selling some for a loss: If you buy cryptocurrency 30 days before or after selling some for a loss, it may generate a wash sale and the loss must be folded back into the purchase.
- Accepting payments in cryptocurrency: If you accept payment for products or services in the form of cryptocurrency, it’s considered earned income and will be taxed at your income tax rate.
- Credit cards tied to cryptocurrency: If you have a credit card tied to a cryptocurrency account, each time you make a purchase it uses a small amount of cryptocurrency to pay for the purchase. This use also qualifies as a taxable event. If your card earns rewards with cryptocurrency, each time you earn rewards value, it’s also taxable.
- Mining cryptocurrency: Any currency mined must be valued at fair-market value and treated as income. Gains or losses will be determined at the time the cryptocurrency is used or sold.
- Tracking: This is where it gets heavy, if it doesn’t sound complex enough for you already. You’ll need to track:
- The date, value, and amount of lots each time you purchase cryptocurrency.
- The date, value, and what lots you use to make a purchase using cryptocurrency.
- The date, value, and what lots you sell off or exchange.
- Whether any purchases of cryptocurrency are made within 30 days before or after selling some lots at a loss.
- Every credit card purchase tied to cryptocurrency.
- Every time your credit card earns rewards tied to cryptocurrency.