Taxes on all cryptocurrency is something you need to be aware of. Even if you have only recently got into crypto and own a small amount.
This article covers tax from a US-based standpoint. Some of it may be applicable in other countries.
Consult the advice of a tax professional before filing your taxes, wherever you live.
Top 10 Cryptocurrency Tax Questions Answered
1. Do I have to pay tax on my cryptocurrency?
Yes & no.
2. What is the capital gains tax on cryptocurrency?
The IRS treats Cryptocurrency like shares and other capital assets. If you make a profit from selling, trading, or spending your cryptocurrency, you have to pay tax on it.
You can also deduct any losses.
The amount of tax you owe on your crypto depends on what tax bracket you are in.
The IRS taxes short-term gains at a higher rate. Like ordinary income. These are assets you have held for under a year.
Long-term gains are usually taxed at a lower rate. These are assets you have held for over a year.
3. What should I do if someone paid me for a product or service with bitcoin?
If you receive cryptocurrency for services or goods sold, you have to pay income tax on the gross amount. The same as if it was Fiat (state issued legal tender) currency. The IRS calculates tax using the dollar value of the cryptocurrency on the day of the transaction.
The IRS has issued guidelines on reporting your digital currency taxes here: https://www.irs.gov/pub/irs-drop/n-14-21.pdf
4. A relative gave me cryptocurrency as a gift. Is it taxable?
Gifting cryptocurrency is becoming more common as crypto grows. It’s not considered a taxable event but is subject to the gift tax.
The gift tax prevents anyone giving away their money before they die to avoid estate tax.
As the recipient of the gift, you owe no tax. The tax burden is on the giver of the gift, but it is unlikely that they will pay tax either. Unless you are dealing with a lot of money.
Currently, for 2017 taxes the gift giver does not have to pay tax on gifts up to $14000 per person per year. The giver can also gift this amount to as many individuals as they like without paying tax.
The lifetime limit means that you can give up to $5.49 million during your lifetime before you have to pay gift tax. If you gifted over the $14,000 per year per person, the extra money would come off your lifetime $5.49 million limit.
You could give ten people $14000 each and it would not affect your lifetime tax-free limit.
5. How much tax do I owe on the ethereum that I bought on Kraken?
There’s no tax on buying cryptocurrency.
If you bought cryptocurrency with your own money you do not have to pay tax on it when you buy.
6. Can’t I keep quiet and not declare my crypto transactions? I only made $150 and they can’t trace me anyway.
You should never even think about messing with the IRS. Look at this list of well-known people. They thought they could get away without having to pay taxes and ended up going to jail or bankrupt.
Many of the exchanges are abroad but some are not. Coinbase is in San Fransisco and currently has over 10 million users and has traded over $50 Billion.
The IRS is not going to ignore numbers like that.
Coinbase received a federal court order in California last year. They had to hand the IRS records for users with over $20,000 in transactions in their account in a single year. The transactions they asked for were between 2013 and 2015. They handed over 14000 user’s records including their tax IDs, names, and addresses.
Coinbase did fight this and stopped the IRS getting access to every account they hold.
This may only be the first step. The IRS could keep pushing for more records until they get everyone. They will make examples of some people for sure.
Don’t let it be you.
Even if you use foreign-based exchanges they are usually linked to your US bank account. If you get audited the IRS may want to know where this money came from if it shows up in your account.
Regulation is coming to cryptocurrency and the IRS will get their money. Don’t risk it, pay your taxes.
If you are a Coinbase user who sold over $20,000. Or if you recorded more than 200 transactions in 2017, you will receive a 1099 from them.
7. Do I file if I paid a contractor with bitcoin?
8. How much tax do I owe if I transfer my ethereum to a hardware wallet?
You can transfer your coins between your own wallets and exchange wallets as many times as you want. This is not considered a taxable event. If you change your ethereum into FIAT currency when it is in an exchange it does become a taxable event. Whether you transfer it to your regular bank account or not.
9. I mined bitcoin but I did not sell any. Do I owe taxes?
You can determine the value of a coin by the fair market value of the coin on the day you mined it. If you mined a bitcoin and it was at $10,000 on that day, then that is the cost basis of your bitcoin for tax purposes.
The IRS will treat this as $10,000 of taxable income for that year.
If you then sold the bitcoin when it was at $15,000 your cost basis would be $10,000. You would owe tax on the $5000 capital gain if you had paid tax on the original $10,000.
There may be deductions for the cost of electricity you used. Also for the depreciation of your mining equipment.
This is subject to whether your mining activities are substantial and continuous enough. If so, you may be able to consider your activities a business and qualify for the deductions.
If the IRS sees your mining activities as a hobby and not a business you may not be able to claim these deductions.
10. I received some bitcoin cash (BCH) when the fork was created. Do I have to report this to the IRS?
Your BCH is taxable income. You have to report it at the market value on the date you gained control over it. If you held BCH in your own wallet the date would most likely be the day of the fork. If you held it in an online exchange it is more likely to be the date your BCH became available.
This value amount also becomes the cost basis for any further transactions with your BCH. If the market value was $300 and you paid tax on that $300. Then, if you later sold your BCH for $400 you can deduct the $300 as this is the cost basis and you have already paid tax on that.
You will only owe capital gains tax on the $100 profit.
You can also choose to treat your BCH cost basis as zero.
Using the same numbers in this scenario:
You would owe capital gains tax on the whole $400 when you sold, spent or traded your BCH. Not only the $100 gain.
Tax laws can be complex. You should not consider these answers as fact when determining your taxes. Consult the advice of a tax professional before filing your taxes.
* Trade Bitcoin Safely is not qualified to give tax advice. This article is for entertainment purposes only. You should not consider it as tax advice. Please consult a tax professional before filing your taxes.
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