Nowadays, it seems like conversations about cryptocurrency tax are popping up everywhere. And it is not just the “tech-savvy” or hardcore investor that brings up the topic, because many people have begun investing in crypto.
Today it seems like crypto has become, for lack of a better term, real.
There are many good reasons why it seems like everyone is talking about crypto. For instance, major financial institutions are investing and recommending to their clients to invest in crypto assets.
NFTs have blown up within the last year, and we now have hundreds of stories of how artists have managed to build small fortunes seemingly overnight.
To summarize, cryptocurrencies are tangible assets that hold real value and, as such, are subject to taxes. The problem is that crypto evolves at an incredible pace, much faster than tax legislation. For this reason, understanding how crypto is taxed can be unclear and even confusing.
This article will give you a primer on crypto from a financial investment standpoint and how you need to think of it in terms of cryptocurrency tax.
What is Cryptocurrency?
Crypto is a digital asset that is cryptographically secured to make sure it can not be duplicated or copied. From a purely practical perspective, crypto can be seen as a unique and unrepeatable digital token.
In a sense, you can view it as a dollar bill. The dollar bill you have in your hand is unique, and the same thing happens with cryptocurrency but in the digital domain.
There is Much More to Crypto than Bitcoin
Bitcoin is the oldest and most prominent cryptocurrency globally at the moment of writing this article. Launched in 2009, Bitcoin has become the gold standard in the crypto economy. It’s worth over $827 billion and, according to many analysts, is forecasted to continue growing.
Even though Bitcoin tends to receive the most attention from the media, there are hundreds of coins that are also part of the crypto economy. These include Ethereum, Solana, Tether, Avalanche, Fantom, and more.
Buying Crypto is Getting Easier
In 2022, it’s become a fast and mostly easy process to buy cryptocurrencies. The most accessible way is to sign up on a cryptocurrency exchange and buy some crypto with your credit card or bank deposit.
Once you’ve added funds to the crypto exchange, you can then send your coins to a wallet. A wallet is a digital wallet that allows you to store and send your cryptocurrencies.
How is Cryptocurrency Taxed?
Crypto is taxed in a way similar to traditional stocks and other appreciating assets. And for this reason, it is essential to report all your gains and losses to the IRS.
Capital assets, such as stocks and crypto, are taxed whenever you report a capital gain or a capital loss.
As an example, if you bought $1,000 worth of Bitcoin when it was worth $30,000 and sold it when it appreciated to $50,000, then you would incur capital gain tax on your profit for that trade. If, on the contrary, the price of Bitcoin dropped to $10,000 and you sold it, then you could deduct the capital loss from your taxes.
What Transactions are Taxable?
Even though crypto is considered a capital asset, some differences exist between crypto and stocks. For this reason, it’s essential to know which transactions are taxable.
- Exchanging crypto for dollars
- Paying for goods or services with crypto
- Trading one cryptocurrency for another
- Mining or receiving and airdrop
Here are some transactions for which you will not be taxed.
- Buying crypto
- Transferring crypto between wallets
- Donating crypto to a charity or giving it to another person
How to Prepare for CryptoCurrency Tax Implications
The key to making sure you pay your crypto taxes accurately is preparing in advance. The last thing you want is to be scrambling the day before tax day, looking for all your transactions, especially if you’ve become an active trader.
Here are some guidelines to help prepare for any crypto tax burden that may come your way.
Know What You Have
Keep track of every movement you make and where you are keeping all your assets. If you use a variety of exchanges and wallets, make sure you know where they are and how much your assets are worth.
By doing this, you’ll be able to keep track of your profits and losses significantly easier.
Pinpoint Rules and Regulations that Will Apply to You
Crypto tax legislation can and will change to keep up with all the advancements in the space. So if you are investing in some new area of crypto, such as Defi, make sure you understand what rules and regulations apply to your activity.
Track Everything
Consider using a trading platform that tracks all your movements for you. Many centralized exchanges provide this service, and you can download a form that you can add to your 1099. But if you are interacting with external protocols or have moved your funds to other wallets, it may be a good idea to use a software service to help you keep track of everything.
Talk to an Experienced CPA
The entire crypto space is moving at a pace that is impossible to keep up with. You constantly have innovations such as play-to-earn games, decentralized finance, yield farming, and countless other innovations that can dramatically change your tax implications.
It’s for this reason, and if you are serious about investing in crypto, it’s a good idea to work with a CPA, like Pasquesi Partners, that can help you stay on track with regulations, proper taxation, and understanding your gains and losses, as well as making sure you file correctly.
In addition to making sure you make the most out of your crypto investment by getting your taxes right, we offer a tax software to help you calculate the gain or loss on your transactions, something mainstream tools like Coinbase don’t offer.
Click here to learn more about what Pasquesi Partners can do to guide you through the cryptocurrency tax process.