There seems to be a lot of confusion and misguided information out there around the taxation of cryptocurrency so we wanted to take the time to discuss it.

Now we all know how slow the government works so although crypto has been around for awhile, the government is constantly revisiting and looking at the way it is handled or taxed. I imagine that there will be changes or further clarifications around crypto as the IRS continues to get their heads around it.

To get started an important thing to know is that the IRS treats crypto as property for tax purposes.

How Is Crypto Taxed?

There are two main ways crypto can be taxed:

• Ordinary Income Tax
• Capital Gains

You can find out more about those in our Blog and Podcast episode, What Is Ordinary Income Tax vs Capital Gain Tax?.

I highly recommend you check that out as we discuss this idea of basis and how to determine gain or loss on sale of assets along with short term vs long-term capital gains.

What Crypto Is Taxed At Capital Gain vs Ordinary Income Tax?

To further break this down, lets look at different types of crypto activity and how they are taxed.

•  Ordinary Income Tax
  • Getting paid using crypto (for goods or services)
  • Mining or staking crypto
  • Receiving air dropped crypto
• Capital Gain Tax
  • Selling crypto for cash/USD
  • Trading one type of crypto for another
  • Using crypto to purchase something (goods or services)

Lets go through a couple examples:

Example 1: You provide consulting services and receive $5,000 worth of crypto. This would be regular ordinary income to you what would need to be reported. Your basis in that crypto would be $5,000 (value when received).

Example 2: You hold on to that crypto you received in example 1 but then 2 months later trade it for another crypto. At that time the value of it grew to $7,500. When you traded one crypto for another you would have a taxable event which would be a short-term capital gain (held for less than 1 year) of $2,500 ($7,500 Value at Sale less $5,000 Original Basis).

Example 3: You hold onto the new crypto from example 2 for a couple years and it grew to $20,000 so you decide to cash it out for USD. When cashing out you would have a taxable event which would be a long-term capital gain (held for more than 1 year) of $12,500 ($20,000 Value of Cash Out less $7,500 of Basis).

This of course is a pretty simplified example. Often times we see people only exchange a portion of the original amount or purchase more crypto on top of an original purchase which makes the basis calculation more complicated.

There is software out there that can help you determine the best options for this but typically you have two methods to determine your cost basis (FIFO or Specific Identification).

What Crypto Activity Is NOT Taxable?

Luckily there are some activities which would not create a taxable event:

• Purchasing Crypto
  • Simply taking USD and buying crypto would not be a taxable event.
• Transferring Your Crypto From One Exchange/Wallet to Another
  • Note this is not trading one crypto for another but rather simply transferring it to another exchange.
• Holding Onto Crypto
  • You will not face a taxable event until you sell, trade, or use the crypto. Simply holding on to crypto that has appreciated in value (Ex: Purchased Bitcoin for $10,000 and now worth $40,000) would not create any taxable event.

What Happens If I Have a Crypto Loss?

If you purchased crypto that went down in value and you then sell, trade, or use the crypto you will have a capital loss. Any capital losses you have can be used to offset your capital gains!

Do I Need To Report Crypto To The IRS?

If you have a taxable event you must report it to the IRS. Your crypto exchange may send you a 1099-MISC or 1099-B reporting your income or gains/losses and this means the IRS is also getting note of it.

Many people think they can fly under the radar and avoid having to report crypto activity to the IRS but that is simply not true. Not only is it illegal but the IRS will continually get better at finding these types of things and will likely not hold back when punishing abusers.

Even if your exchange did not send you a 1099-MISC or 1099-B it is still important that you report any crypto income or gains/losses on your tax return. Again there is software out there that can help make determining what to report much easier.

What Are Some Tax Strategies Around Crypto?

As with everything we do here there are some tax strategies we want to think about when it comes to crypto activity.

• Use a Charitable Remainder Trust (CRT) To Eliminate Large Capital Gains
  • We are doing an entire Blog and Podcast episode on CRT's next week. You can check this out here.
• Utilize an S Corp for Crypto Business Income (Receiving for Goods/Services, Staking/Mining, etc)
  • If you are expecting profit of roughly $50k or more from crypto business income then you will want to check out an S Corporation. You can check out our entire series on this here, Everything You Need To Know About S Corporations.
• Invest in Crypto Through Self Directed Roth IRA or Roth 401k
  • Pay no taxes on the potential massive gains from your crypto trades.
• Join Our Tax Minimization Program
  • Library of Tax Strategies, Implementation Guides, Videos, Downloads, etc.
  • Ask A Pro - Unlimited email access to our team, it is like having an accountant in your back pocket!
  • Monthly Group Trainings
  • and so much more, sign-up here!