Taxes can be complex when dealing with traditional incomes and investments in properties or stocks. Adding cryptocurrencies to these taxable activities can make the taxation process even more difficult. Here’s a summary of what you should know about taxation if you’re involved in cryptocurrencies in any capacity.
How Does the IRS Tax Cryptocurrencies?
Cryptocurrencies are considered digital assets, and the IRS treats them similarly to property, stocks, and bonds. This means that crypto is taxed as capital gains or income and that both gains and losses need to be reported on your tax return. That said, not all crypto activities need to be reported on your tax return, though tracking your crypto assets, whether taxable or not, is always a good idea.
The rates at which cryptocurrencies are taxed are variable, following the same capital gains and tax rates as traditional income. The amount you are taxed will vary based on factors such as how long you’ve held the asset, the amount you earned from it, and your marital status. The length of time you’ve held a cryptocurrency also impacts your tax rate, depending on whether it was a short-term (a year or less) or long-term (more than a year) gain. Long-term gains tend to have lower tax rates, though both long- and short-term rates depend on total taxable income.
What Taxable Crypto Activities Do You Need to Report to the IRS?
While not all crypto activities need to be reported, activities like crypto sales, conversions, payments, and income need to be.
Crypto Sales
Selling any cryptocurrency assets you hold needs to be reported. Reporting this will take into account your original investment as well as anything spent to facilitate the investment. This means that if you spend $200 on a cryptocurrency and the crypto appreciates to a value of $600, you’ll only be taxed on the gain of $400.
Whether you gain or lose money in the process doesn’t matter; both gains and losses need to be reported on your return.
Crypto Conversions
Converting one cryptocurrency to another may not sound like a taxable event, but in the eyes of the IRS, it is. If the conversion is made from a crypto asset that has appreciated or depreciated in value since you first invested, mined, or earned it, any gains or losses at the time of converting cryptocurrencies need to be reported—even if you’re trading $200 worth of one crypto for $200 of another.
Crypto Payments
Whether you receive crypto or spend it in exchange for goods and services, these amounts need to be tracked and claimed. This can become complicated for those who make frequent transactions using crypto. When claiming transactions on your tax return, you need to track the value of your payment the day it was made to accurately report it. This is why frequent transactions can make tax reporting more complicated. Reviewing your records to calculate each transaction and its value from the day it was made is a lot of work.
Crypto Income
If you receive crypto as payment from your employer or earn it through transactions, mining, or staking, you claim the amount earned as standard income on your tax return. You’ll be taxed at a rate ranging from 10% to 37% based on your earnings.
Just like you’ll get taxed when you win real money on some of the popular slots sites or state lotteries, you’ll also be taxed on any crypto income you get beyond transactions or mining. Airdrops, forks, and other promotions where you receive more crypto count as taxable income. This needs to be reported on your taxes based on the currency’s value the day you received it.
What Are Non-Taxable Crypto Activities?
Not all crypto activities are taxed. As with traditional capital assets, income gained through tax-sheltered accounts, such as a Roth IRA, is not taxed. However, the amounts earned still need to be reported. Additionally, buying, donating, gifting, or receiving crypto are non-taxable activities for most people.
Purchasing and Holding Crypto
Buying and holding cryptocurrency will not be taxed until you sell, convert, or spend it. You’ll still want to report it on your return, as it will help you establish gains and losses in the future.
Donating Crypto
Any crypto that you donate to a qualifying non-profit or charity organization may be eligible for a charitable deduction, which can help offset how much you owe on your taxes.
The amount you report for donations will be based on the crypto’s value for the donation date. Donations exceeding $250 may require a receipt to be eligible.
Giving or Receiving Crypto as a Gift
Receiving a crypto gift has no tax implications unless you sell, convert, or make payments with it. For those gifting it, some taxes may be incurred. In 2024, if someone gives a gift of $18,000 or less, they won’t be taxed. This amount applies per recipient, not as a total for all gifts given. For amounts exceeding $18,000, however, you may incur taxes, though this too depends on the recipient; spouses, for example, have a higher pre-tax gift amount than other recipients.
How Do You Report Crypto Activities to the IRS?
To report crypto activities to the IRS, you include them in your tax return using forms such as:
● Form 1040, Schedule D, and Form 8949 for buying and selling crypto
● Schedule C or Schedule SE for earning crypto as part of your income through payments, mining, or staking
● Form 1099-B for making crypto transactions (most crypto trading platforms will provide you with one)
However, the forms you need to include in your return may differ depending on your situation. Familiarize yourself with the crypto forms detailed on the IRS website to help you determine which ones you need. Another option is to speak with a financial advisor or use a tax filing service such as TurboTax. These services walk you through everything you need, guiding you through the tax process to minimize mistakes and ensure you provide all the correct information.
