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Cryptocurrency taxes; you probably have a lot of questions. We don’t blame you — regulation in the space has been spotty, at best. We’ve put together this handy FAQ to answer some of the initial questions you may have about crypto tax, and some you may not have even thought of.
Don’t see your question here? Feel free to contact us. BitTaxer has a team of professional CPAs who can help get you on your way to accurately-calculated cryptocurrency taxes nirvana.
There’s no regulation. So is cryptocurrency taxable?
Is cryptocurrency taxable is the first and most common question with regards to cryptocurrency taxes. The IRS actually issued some cryptocurrency guidance about crypto tax back in 2014, making it clear that virtual currency is treated like a capital asset, but it’s been shown that many people haven’t been proactive in taking the warning seriously. Sure, the IRS only formally requires third-party reporting for cryptocurrency traders who trade above a certain threshold, but given the boom we have seen over the last 12 months, we believed this is just a first step toward greater awareness by the regulators more generally, and that users of cryptocurrency should act accordingly.
Once we started to see the writing on the wall, and the steps toward regulatory oversight that were taking shape, we thought the community needed an easy solution to avoid scrutiny from the IRS about their crypto tax while engaging in a fully lawful activity.
Our suspicions were confirmed when Coinbase was recently forced to turn over 13,000 user records to the IRS, demonstrating that this was not an abstract concern. No one wants to be audited, and the lens of scrutiny seems to be opening in scope, so we think it’s always best to be prepared.
So – is cryptocurrency taxable? You bet!
How do you calculate capital gains?
Capital gains (and losses!) are calculated by determining how much your initial investment has gone up or down from the time you acquired it to a triggering event (also known as “taxable event”).
What’s a taxable event?
A taxable event is typically when you dispose of an asset, usually by selling it or converting it to FIAT currency (aka – the US dollar or any other government issued money). That means if you traded Ethereum for an altcoin, your exchange triggered a taxable event, as selling tokens is treated as a capital gain.
Taxable events can also occur whenever crypto is used to purchase goods or services or when charitable gifts are given.
What about holding periods?
A holding period refers to the amount of time you have held or had access to the asset—usually the time frame between acquisition to “taxable event”. Short-term gains and losses are calculated on assets held for one year or less; Long-term gains are calculated on anything more mature than that.
If I buy cryptocurrency but don’t cash out, do I still owe crypto tax on it?
It’s complicated. You might have a taxable event even if you’re not converting your virtual currency to FIAT. For example, paying for goods and services with crypto is treated like a sale (we’re sad about it, too). See also: “What’s a taxable event?”
I pay fees when I trade cryptocurrency on exchanges. What do I do with those costs?
Investment-related fees may be able to be deducted on your Schedule A if you itemize, but that only applies to 2017 and previous. The new tax reform eliminated this deduction through 2025. Some exchanges report sales proceeds net of investment/transaction fees. In this case, you may get a benefit. However, if your business owns the investments, rather than you personally, there may be an opportunity to deduct investment-related fees. Best to talk to a licensed CPA on this one, as it can get a little tricky.
I received a payment in crypto. Do I have to report it?
Receiving payments for goods, services or even your salary can be treated as ordinary income. It is usually valued at the market price of the coin upon receipt.
I spent crypto. What does that mean for my taxes?
It’s a bit of an odd area, but spending virtual currency does, indeed, mean you have triggered a taxable event. Depending on the holding period, it could be short or long term gains, which are subject to different rates.
So how do I report my gains and losses?
Most exchanges do not issue a 1099-B form for you, nor do they offer any services to help you calculate your net profits and losses for the year. Many don’t even allow transactions in FIAT. All of this means a lot of self-reporting is necessary.
Luckily, BitTaxer can help you easily calculate your gains and losses for your cryptocurrency taxes without much effort on your part. You simply provide the data or API information from your virtual currency exchange of choice, answer a few questions and, in just a few minutes, are given a report which can be directly imported into your chosen tax software or provided to your tax preparer.
Usually gains and losses are recorded on a Schedule D, and then transferred to the federal form 1040. Crypto tax made easy!
But I lost money! What does that mean for my cryptocurrency taxes?
It’s never fun to lose on your investment. Fortunately, if your losses exceed your gains, they offset your crypto tax obligation. You don’t need to file a Schedule D if you don’t have any realized gains and losses.
Tell me about air drops.
Yep, those are considered ordinary income, too. The value on the day or the air drop will become the basis on which your capital gains or losses are calculated. Remember to include this information on your cryptocurrency taxes.
I’m a miner. What does my tax obligation look like?
Same goes for miners. Your coins are treated like ordinary income and the value is calculated at the market price on the day it was successfully mined.
I invested in an ICO. What does that mean for my taxes?
For the investor, the coins are valued at market price at the time received, and become taxable when disposed of during a taxable event. See: What’s a Taxable Event?
For the company hosting the ICO, there’s a lot that is still unknown about how they will be taxed. Taxation depends on facts and circumstances of each ICO. What we do know is that ICOs generally do not fall under the IRS’s tax-free treatment for raising capital and are calculated like normal income for the company holding the ICO and issuing coins.
Don’t see your crypto tax question here? Feel free to contact us. BitTaxer has a team of professional CPAs who can help get you on your way to accurately-calculated tax nirvana.