How Your Crypto Gains Are Taxed in the United States

In the United States, cryptocurrencies are treated as property for tax purposes, meaning that the same tax principles that apply to stocks, bonds, and real estate also apply to cryptocurrency transactions.

This means that any gains or losses from the sale or exchange of cryptocurrency are subject to capital gains tax. Capital gains are calculated by subtracting the cost basis of the cryptocurrency (i.e., the amount you paid to acquire it) from the amount you received when you sold it.

As a tax preparer, it’s important to understand how cryptocurrency gains are taxed.

Here are some key points to keep in mind:

Cryptocurrencies are treated as property for tax purposes.
Capital gains tax principles that apply to stocks, bonds, and real estate also apply to cryptocurrency transactions.
Gains or losses from the sale or exchange of cryptocurrency are subject to capital gains tax.
Capital gains are calculated by subtracting the cost basis of the cryptocurrency from the amount received when it was sold.
If the cryptocurrency was held for less than a year, gains are taxed at the ordinary income tax rate; if held for more than a year, gains are taxed at the long-term capital gains rate.
All cryptocurrency transactions, including purchases, sales, and trades, as well as any fees incurred, must be tracked to accurately determine the cost basis and the amount of tax owed.
If paid in cryptocurrency for goods or services, the fair market value at the time of receipt is treated as income and subject to income tax.
If cryptocurrency is mined, the fair market value at the time of receipt is considered income and subject to income tax.

It is important to note that the Internal Revenue Service (IRS) has increased its focus on cryptocurrency tax compliance in recent years and has been sending warning letters to cryptocurrency investors who may not have accurately reported their gains and losses. Therefore, it is recommended that you consult with a tax professional or use tax software to ensure that you are accurately reporting your cryptocurrency transactions on your tax return.

We love to help our community of Tax Professionals, as well as business owners! Check out our course, Virtual Currency and the Tax Preparer. Raise your skill and your fill bag!

Keep Building!