What are Taxable Events for Cryptocurrency
As an emerging investment asset class, understanding the tax implications in the crypto currency market can be tricky. The IRS provides a very basic framework and guidelines, which will most probably be modified over time.
Although Digital Assets are commonly being referred to as Cryptocurrency, the IRS does not recognize them as currencies at all, Digital Assets are being treated and taxed as real property.
What are Taxable Events for Digital Assets?
According to official IRS Guidance from 2014, the following taxable events (requirement to report your taxes) are:
- Exchanging Crypto for Fiat: Just like selling a house or other property, when you sell a coin for fiat (USD) the profits are taxable.
- Exchanging Crypto for Crypto: When converting one cryptocurrency for another it is taxable. When buying some altcoins you may only be able to do so using Bitcoin or Ethereum not USD. Therefore in that case scenario there is no way to avoid being taxed. The IRS looks at this transaction as selling the first coin for USD, then using USD to buy other coin.
- Earning Cryptocurrency: Whether you are mining coins, accepting crypto as payment or earning interest, the gain is taxable and must be reported.
- Using your Coin to Purchase Goods or Services: When you use your coins for commercial transactions, it is as if you are “selling” your property and using the crypto for cash, then using the cash for your transactions. This is a taxable event.
Non Taxable Events for Digital Assets
To be clear, the following events are not considered taxable at this time:
- Transferring your coins between your own exchanges or wallets.
- Buying coins using USD. It only becomes taxable once used to purchase goods or services, sold or traded for another coin)
- Gifting Cryptocurrency is not a taxable event. If you gift over 15,000 a year you may have to prepare a gift tax return, but it is not taxed. Another interesting fact is you can gift crypto to a charity for a tax deduction!
How will the IRS find out about your Digital Assets?
After years of legal battles, the IRS now receives a form 1099-k from all the major US exchanges and some foreign exchanges too, which reports your total sales volume. If the IRS receives this form, and nothing has been reported on your end, you could be at risk for an audit in addition to paying the taxes owed, plus a penalty for failing to report your crypto.
Keep in mind, one the key benefits of blockchain technology is that the Hashes keep track of every transaction so it is possible to create a full report for prior years if need be. That being said, the IRS can see the same information if auditing your asset so best to report it on your schedule C.
How Crypto is Taxed?
Since the 1099-k only illustrates the total amount of proceeds & total sales volumes, it can show inaccurate (much higher) values that are not your true capital gain. And yes, Digital Assets are taxed at the Capital Gains levels. If the property is held for less than 1 year they will be taxed as short term investment at your income level.
This is another reason why it is important that you track your transactions for an accurate cost basis. If you are mining your own coin, you may also expense cost such as electricity, your computer or as mentioned previously, a charitable donation.
Linn Wealth Capital Management always recommends consulting with your tax advisor when considering your specific tax situation and changing nature of this space.
Linn Wealth Capital Management is a registered investment adviser.
As with all crypto assets, a complete loss of capital is always a potential outcome.
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