Cryptocurrency’s meteoric rise and fall has fascinated investors, while simultaneously raising a host of tax questions. With enforcement stepped up by the IRS, digital asset holders must be wary of possible tax implications when holding or trading digital assets – here is what you need to know about whether you owe taxes on crypto currencies.
No matter whether you are buying, selling, trading or simply holding cryptocurrency, owning it does not incur taxes. Taxes only become due when creating a taxable event by selling off crypto or when its value increases – for instance when using cryptocurrency to pay for goods and services its increased value triggers a capital gain that must be reported on taxes; similarly when selling for more than you initially paid will yield realized capital gains – just like when selling any other investment.
As part of your tax calculations, it is necessary to track the original purchase or acquisition price (cost basis) of each cryptocurrency transaction to ascertain effective realized prices and capital gains or losses you recognize. Due to its constantly shifting economy, tracking this information can be challenging: coins constantly move between exchanges and wallets and you may incur fees when moving them from your centralized exchange wallet or when changing between currencies; all transaction costs must be included when filing taxes.
As part of its increased enforcement activities, the IRS has engaged contractors such as Chainalysis to review blockchain records and match “anonymous” crypto wallets with known individuals. Major crypto exchanges now send their 1099 forms with detailed information regarding your crypto-to-crypto transactions to the IRS – this new reporting requirement could encourage more people to utilize decentralized exchanges or peer-to-peer systems instead of those reporting their activity directly to them.
Do I owe taxes when mining crypto currency or receiving it as gifts/donations?
Mining cryptocurrency, earning it through promotions or receiving it as payment for goods or services counts as regular taxable income and is subject to income-tax rates. When sold for more than it was worth at the time of receipt, any short- or long-term capital gains taxes applicable depend upon how long you held onto it for.
At present, selling cryptocurrency at a loss allows you to offset capital gains for that year or carry forward losses for future years. Legislators are expected to eventually close this loophole; until then it is important that you carefully consider all factors when making decisions related to cryptocurrency investments or trades. If in doubt about your situation consult a licensed tax professional; NerdWallet TaxBit can also be an excellent solution in helping manage crypto taxes – connecting directly to exchange accounts, compiling data from them, and producing IRS Form 8949 automatically for you. For more details please visit NerdWallet TaxBit page