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Love them, tolerate them, or hate them, taxes are a part of everyday life for nearly everyone in the modern world. In addition to the sales tax, property tax, and income tax, you also have to pay a tax on profitable investments — and this includes cryptocurrency. In this article (and the following ones in this series), we’re going to cover U.S. tax laws at the national level.
If you’re buying and selling crypto in another tax jurisdiction, you’ll have to check your local laws on crypto taxes. Much like other taxes, crypto tax laws and rates can vary substantially between countries.
Do I Have To Self-Report My Crypto Holdings?
If you hold crypto in any amount, you have to report it to the Internal Revenue Service (IRS) on Form 1040; this is the tax document nearly every U.S. citizen must file every year. In addition, non-residents and foreign nationals that live within the U.S. that must pay other taxes (like the standard U.S. income tax) are also subject to largely the same crypto tax rules as U.S. citizens.
While honest mistakes can be made, you can no longer plead reporting ignorance as the 1040 form explicitly asks if you have any crypto (and has done so since 2019). It doesn’t matter if you bought it or if it was gifted to you, you’re expected to report it. Beyond that, there is no minimum exception to this rule. Whether you have 10 bitcoin (BTC) or a small fraction of bitcoin (0.00000256 BTC), it’s all the same in the eyes of the IRS.
If you didn’t report your crypto holdings at the onset, it’s recommended that you file amended tax returns to accurately reflect your crypto portfolio from its inception. For example, if you first bought crypto in 2016 and didn’t report it until 2020, you’d probably want to file amended returns for 2016, 2017, 2018, and 2019. This could save you from having potential problems in the future. In general, the IRS has allowed for amended returns that reflect crypto holdings when done in good faith (and without financial penalties). If you don’t amend inaccurate returns, it is more likely that you could face financial penalties and other consequences.
How Does the IRS Classify Crypto?
Vexing many crypto purists, the IRS doesn’t treat cryptocurrency as a “currency;” they treat it as property. With this classification, a crypto portfolio is treated in much the same way as a stock portfolio — at least from the IRS’ perspective. If you’re familiar with how your stock portfolio is taxed, you’ll be ahead of the crypto curve when it comes to understanding crypto tax implications as well. Like stocks, crypto allows for both capital losses and capital gains — depending on if you’re selling for a profit or a loss. Crypto is also taxed differently based on how long you’ve held it, with short-term and long-term capital gains being taxed at different rates.
What Does the IRS Consider Crypto?
Beyond BTC, the IRS classifies nearly all digital assets (coins and tokens) as crypto “property.” This includes dogecoin (DOGE), litecoin (LTC), ether (ETH), and many more. This even includes stablecoins and non-fungible tokens (NFTs). If you sold that Bored Ape NFT for millions, the IRS says that you owe taxes on it. If you are still holding onto a prized, pricey, and profitable NFT, you don’t owe taxes until you sell.
What Triggers a Taxable Event for Crypto Holders?
If you simply buy and hold one or more cryptocurrencies (and do nothing more), you shouldn’t have to pay crypto taxes — yet. If you’ve simply been buying and holding (or HODLing), you can hold off on paying taxes until you decide to sell. Like stocks, you’ll trigger a taxable event if you sell your crypto for a profit.
Like retail stock traders, some crypto holders choose to sell crypto for the U.S. dollar (USD). Unlike the stock market, you also have the option to trade crypto for crypto directly (as opposed to cashing out for USD). This will also trigger a taxable event.
For example, let’s say you bought some DOGE and the price increased. You then later traded (or sold) this DOGE for BTC. This would also be considered a taxable event. Any profitable crypto-to-crypto trade is a taxable event, including: crypto to stablecoin, NFT to crypto, NFT to stablecoin, and so on. For unprofitable trades, you may be able to harvest capital losses (like in the stock market).
Further, when you pay for a good or service with crypto, the IRS can also consider this a taxable event. Let’s say you bought some bitcoin cash (BCH) at $100. It later increases in price to $150 and you decide to buy a coffee for the equivalent of $8 in BCH. Because of the price appreciation, you’d incur a capital gains tax for this purchase (albeit a small one).
This IRS ruling (and the associated hassle) on crypto purchases may be one impediment to crypto payment adoption within the U.S. When you have to pay a tax when buying something, many will simply choose to pay in fiat currency instead. Many within crypto circles have argued for a reasonable de minimis exemption of up to $100 that wouldn’t incur any taxes or reporting issues. This would allow you to make a crypto purchase up to that amount ($100 in this example) without incurring a tax obligation, allowing you to pay for a croissant, a haircut, some pints of beer, or a few movie tickets without any regulatory friction. For more expensive purchases (like a car or house), even if this rule was enacted, the aforementioned crypto taxes would still apply.
Going Beyond the Crypto Tax Basics
While this primer hopefully provided some useful information, there is a lot more to cover when it comes to U.S. crypto tax law. In addition to learning how to crunch the specific crypto tax numbers, there are several other issues that need to be addressed, including: accepting crypto payments (as a business), receiving your income in crypto, and how to treat airdrops, hard forks, and the crypto rewards from staking and mining crypto on various blockchain protocols. These issues will be addressed in the following articles within this series. If you have crypto or are considering purchasing it, you’ll want to read on to see how these laws will affect you. These effects are not limited to merely how you use crypto, it will also affect how profitable your purchases could be — and may even induce you to change your investing strategies to maximize the tax benefits of various investing theses.
- The IRS classifies nearly all digital assets as property, including: traditional cryptocurrencies, stablecoins, and NFTs.
- Defined as property, these cryptocurrencies are taxed in much the same way a stock portfolio would be.
- Crypto taxes are triggered when selling crypto for a profit, trading between cryptocurrencies, and using crypto to pay for goods and services.
Disclaimer: This crypto tax series is merely for informational purposes and should not be considered legal or tax advice. Please solicit the services of a crypto knowledgeable certified public accountant, tax professional, or lawyer should you need further guidance.We answer common crypto tax questions so you can be better prepared for tax season.