No matter which coin, wallet, or exchange you use, there is one common question that we all have: am I going to owe taxes? With the rise of cryptocurrency and new coins released throughout the year, the IRS has provided guidance on how the tax code treats crypto.
While you can spend your weekend enjoying some light reading of the Internal Revenue Code, here are some highlights to help you determine potential reporting requirements and tax implications from trading your crypto holdings:
Do Crypto holdings need to be reported to the IRS?
Within the past few years, the IRS has started to include questions on tax returns relating to cryptocurrency. While you are not required to report that you currently have crypto holdings, the question asks if you bought, sold, exchanged, or received crypto during the year. If you had any type of transaction with crypto, you will need to check the “Yes” box on your tax return.
How is Crypto taxed?
For Federal income tax purposes, the IRS treats crypto similar to that of stocks or property. Meaning that, when you sell or exchange your coins, you will either realize a capital gain or loss.
How to calculate cost basis?
Your cost basis is the amount you spent to acquire the coin. This can include any fees or commissions that you also paid.
An easy way to calculate your cost basis is = (Purchase Price + Fees) / Quantity.
How to calculate capital gains?
If your basis (the amount you paid for the coin) is higher than what you received (from selling or exchanging it), then you will realize a capital loss and may be able to deduct this against your taxes. If your basis is less than the amount you received, then you will realize a capital gain and potentially owe income taxes. If you sell for a lower value, then you will realize a loss and may be able to deduct this against your taxes.
Is transferring coins between wallets a taxable event?
No. If you transfer coins from a wallet, address, or account that belongs to you, to another wallet, address, or account that also belongs to you, then the transfer is not a taxable event. Even if you receive an information return from the exchange for the transfer, this is not a taxable event.
Is exchanging coins for another coin a taxable event?
Yes. If you exchange or convert your crypto for another type of coin, then the transaction is a taxable event.
Is cashing out coins a taxable event?
Yes. If you exchange your crypto for fiat money (like USD), then the transaction is a taxable event.
Is paying for goods and services with crypto a taxable event?
Yes, and no. Using crypto to pay for personal purchases, such as lunch or coffee, is a taxable event. However, the tax code allows taxpayers to exclude up to $200 of gain per transaction if it’s associated with a day-to-day transaction, like buying lunch or coffee. This is known as a de minimis election, which is meant to account for foreign currency exchange rates.
Are gains (or losses) taxed as long-term or short-term?
Depending on how long you held your coins, you will recognize short-term capital gains (or losses) if held for less than 1 year. Short-term capital gains are taxed as though they are ordinary income. If held longer than 1 year, you will recognize long-term capital gains (or losses). Long-term capital gains are taxed at preferential rates.
Be sure to consult a tax professional (like me) to fully understand your income reporting requirements and tax implications from trading. If you would like to work with a financial planner to walk you through your options, I would love to help you!
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Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.