When Do You Owe Taxes on Your Bitcoin and Cryptocurrency?
A lot of individuals that got into the exciting world of bitcoin and cryptocurrency have unintentionally learned about the tax implications of it all and are now asking the above question. Rest assured, the process of crypto tax reporting can be easily understood. This article breaks down taxable events and explains when you do or do not owe capital gains tax on your cryptocurrency transactions.
How is crypto taxed in the US?
The IRS treats cryptocurrencies as property for tax purposes. Just like other forms of property then—stocks, bonds, real estate—you incur a tax reporting liability on the capital gains and losses from your cryptocurrency transactions.
In this sense, cryptocurrency trading looks similar to trading stocks for tax purposes. For a detailed guide on how crypto is taxed, please reference our complete guide.
When do you owe taxes on your crypto transactions?
You owe a tax on any bitcoin or cryptocurrency transaction whenever you incur a taxable event.
A taxable event is a specific action that triggers a gain or loss. Listed below are all of the taxable events for cryptocurrency taken from the IRS guidance of 2014:
- Trading cryptocurrency to fiat currency like the US dollar is a taxable event
- Trading cryptocurrency to cryptocurrency is a taxable event (you have to calculate the fair market value in USD at the time of the trade)
- Using cryptocurrency for goods and services is a taxable event (again, you have to calculate the fair market value in USD at the time of the trade; you may also end up owing sales tax)
I purchased 0.5 Bitcoin on Coinbase for $1,000. Two months later I sold it for $1,500. Per the above, this sale triggers a taxable event, and you will owe a tax on that $500 gain. This is exactly like the world of trading stocks. You can learn how to report this sale on your taxes here.
What is NOT a taxable event?
Just as important as understanding when you incur a tax liability, it’s important to know when you do not. The below were again taken from the IRS guidance and explain what types of transactions are not taxable when dealing with bitcoin and cryptocurrency:
- Giving cryptocurrency as a gift is not a taxable event (the recipient inherits the cost basis; the gift tax still applies if you exceed the gift tax exemption amount)
- A wallet-to-wallet transfer is not a taxable event (you can transfer between exchanges or wallets without realizing capital gains and losses, so make sure to check your records against the records of your exchanges as they may count transfers as taxable events as a safe harbor)
- Buying cryptocurrency with USD is not a taxable event. You don’t realize gains until you trade, use, or sell your crypto. If you hold longer than a year you can realize long-term capital gains (which are about half the rate of short-term) if you hold less than a year you realize short-term capital gains and losses.
Let’s say again I purchased 0.5 Bitcoin for $1,000 on Coinbase. After purchasing, I send this Bitcoin to my ledger wallet to store.
I would not owe any tax at this point as sending and depositing cryptocurrency is not taxable. I have not incurred a tax liability in this case.
What if I mined cryptocurrency?
If you mined cryptocurrency during the year, you will owe income taxes on this form of income. To learn more about how to handle this, checkout our complete guide on mining cryptocurrency taxes.
When it gets tricky
Things get the trickiest when you are trading one cryptocurrency for another (a very common thing to do for traders). Trading one crypto for another also trigger a taxable event, and you need to report the details of every crypto-to-crypto trade you made on the IRS form 8949 that is included with your yearly tax return.
This can quickly become problematic for cryptocurrency traders. Because of this problem, thousands of cryptocurrency users are leveraging crypto tax software to automate the entire process of cryptocurrency tax reporting.
Can I save money on my taxes if I lost money trading cryptocurrency?
If you lost money trading crypto, you can and should file this with your taxes so that you save money on your tax bill.
Just like incurring a taxable event when you traded your crypto for a capital gain, you also incur that same taxable event when you trade for a loss. These losses can potentially save you quite a bit of money if the scenario is right.
Our post detailing how to deal with crypto losses for tax purposes walks through exactly how this works and how you can benefit.
Leveraging Crypto Tax Software
Crypto tax software like CryptoTrader.Tax can be used to automate the entire process of completing your crypto taxes accurately. Simply import your trades from all of your exchanges and have the software do the heavy number crunching. The auto-generated reports can be imported into tax filing software like TurboTax or TaxAct, given to your accountant, or filed yourself.
*This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.