While many of the laws and regulations that govern cryptocurrency are still evolving, one thing that has been consistent -- going back all the way to 2014 -- is that certain crypto transactions can trigger taxable events.
Since virtual currencies are considered a digital asset in the United States, the Internal Revenue Service (IRS) treats them pretty much like any other capital asset (stocks, bonds, etc), according to IRS Notice 2014-21. Therefore, the money that you gain from crypto is subject to different tax rates, depending on whether your earnings are from income or capital gains -- which depends on how you got the cryptocurrency, how you used it, and how long you have held it for.
In order to determine whether you owe any crypto taxes, you need to review what you did with your crypto. That's because certain transactions might be considered taxable events while other transactions might be considered non-taxable events.
This article will offer some common examples of when transactions involving virtual currencies might lead to capital gains taxes, income taxes, or no tax liability at all.
Taxable Capital Gains Transactions
Most cryptocurrency investors who sell their crypto for a profit are subject to capital gains taxes on that profit -- just like you would be if you made a gain from the sale of a stock.
Here are a couple of common scenarios that could make you get hit with capital gains taxes from your digital assets.
Converting one cryptocurrency into another virtual currency can cause you to owe capital gains taxes. For example, let's say that you sell your bitcoins to purchase ether. Since you've technically sold a digital asset, then the IRS will consider it a taxable event. That means you will owe capital gains taxes on any profit that you make from your bitcoins.
Furthermore, if you use crypto to purchase products and services, these transactions are considered taxable events by the IRS as well. That's because you have to sell the digital asset before you can exchange it for a product or service, and selling crypto subjects you to capital gains taxes.
Taxable Income Tax Transactions
If you get paid in cryptocurrency, your crypto will be subject to ordinary income taxes, according to the IRS. That also goes for business owners who accept digital assets as payment for their goods and services. If you are a crypto-miner, you will likely have to pay taxes on your earnings based on the value of the mined coins at the time that you received them.
If you win cryptocurrency in a contest or sweepstakes, you will have to pay income taxes on it -- just like you would after earning any other prize money.
Remember, it's your responsibility to report your crypto earnings to the IRS, even if you don't receive an official tax form from the entity that paid you the cryptocurrency. The days of anonymous cryptocurrency transactions are over. Taxpayers who fail to report all of their crypto earnings can be subject to steep IRS penalties.
Non-Taxable Cryptocurrency Transactions
For example, if you just buy cryptocurrency with cash and then hold it in your crypto wallet, you won't owe any taxes just from buying and owning it. It's just like you don't owe taxes on the cash that you hold in your physical wallet. Also, if you transfer crypto between your accounts or wallets, your transaction isn't taxable. It's similar to transferring money between different bank accounts.
If you are lucky enough to receive a digital asset as a gift, you won't owe any taxes until you sell it. However, if the value of the gift is greater than $16,000, then the giver might have to pay what are known as gift taxes.
Furthermore, if you donate your cryptocurrency to a qualified, tax-exempt non-profit or charity, you might be able to claim the donation as a charitable tax deduction. Your tax preparer can tell you whether your donation qualifies for a deduction.
In short, depending on how you get and use crypto, you might be subject to taxes. For example, if you sell any digital asset for gain, you will likely owe capital gains taxes on it. Furthermore, if you receive earnings or payments in cryptocurrency, you will likely be subject to income taxes. However, not all crypto transactions trigger taxable events. For instance, if you buy a digital asset with cash and hold onto it, you haven't received a gain, and thereby won't owe any taxes on the transaction. Since tax laws can be tricky, you might want to consider consulting a tax professional for help when filing your taxes. That way you can be sure that you have correctly calculated your crypto tax liabilities, so that you can avoid getting hit with any IRS penalties.