If you’re dabbling in cryptocurrency, make sure you understand your tax liabilities or you could find yourself facing an IRS audit, penalties, and interest fees!
How is Cryptocurrency Taxed?
Although most people think of cryptocurrency as virtual currency, the IRS treats it as property. This means that you’ll likely need to report capital gains or losses. There are, however, some activities that result in earned income. This is treated as ordinary income and taxed at your marginal rate.
Not sure if you need to pay taxes on your cryptocurrency dealings? Here’s a quick look at some cryptocurrency activities that could trigger a taxable event.
If you sell your virtual currency for more than your original purchase price, you’ll need to report the gain on your tax return. Depending on how long you’ve held the cryptocurrency, it could be a short-term or long-term gain. On the other hand, if you sold it at a loss, you may use it to offset other gains or roll it forward for future use.
The IRS views cryptocurrency earned in exchange for mining as taxable income. You should receive a 1099-NEC which shows the value of the cryptocurrency when you received it. But even if you don’t, you must report it as income on your tax return. You may also be subject to self-employment taxes.
Spending Your Virtual Currency
Did you use cryptocurrency to purchase items? This too could result in a capital gain. Let’s say you buy $500 in Bitcoin, and three months later it increases in value to $1,000. You then use that money to purchase a new TV. When you file taxes, you’ll need to claim a short-term capital gain of $500. Things can get tricky when making multiple smaller purchases because you’ll need to factor in your cost basis to determine if there was a gain or loss for each.
Payment For Goods or Services
If you receive virtual currency as payment for services rendered or for goods sold, this counts as taxable income. It must be reported on your income tax return at the fair market value (FMV) for the day and time you received it. Be sure to keep good records or this could be a real headache when you file.
Did you trade or exchange one type of cryptocurrency for another? This is another instance where you’ll need to report potential capital gains or losses. For example, if you bought $500 worth of Dogecoin and it increased in value to $800 and then traded for $800 in Ethereum, you will have a capital gain of $300.
If you receive free tokens/coins as part of an airdrop, this is a taxable event. You must report the value of the new coins as income on your return.
Donating to Charity
Do you use cryptocurrency to make charitable donations or gifts? If so, you can deduct the FMV from your taxes if you itemize. These are treated as a non-cash donation, and you won’t have to pay capital gains. If the amount is over $250, get a written acknowledgment or receipt from the qualified charity.
Not all crypto transactions result in a taxable event but knowing which should be reported can be tricky. We highly recommend consulting with a tax professional to ensure your taxes are accurately filed.
Cryptocurrency Tax Services
At Tax Defense Network, our tax experts can help you determine your cryptocurrency tax liability and stay compliant with the IRS. Whether you need to amend a past return or could use some guidance on how to report various crypto activities, we’ve got your back. Call 855-476-6920 for a free consultation and quote today!