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cryptocurrency tax

Six Tax Items Every Cryptocurrency Investor Should Know

Leave a Comment / All Posts, Digital Assets, Financial Growth, Financial Management, Personal Tax

cryptocurrency tax

Key Takeaways from Six Tax Items Every Cryptocurrency Investor Should Know:

  1. Selling, trading and certain other crypto transactions are normally taxable events.
  2.  If you hold cryptocurrency for more than 12 months, you might be eligible for a favorable capital gains rate on any realized gains.
  3. Some cryptocurrency transactions are reportable even if they aren’t taxable.

Nipsey Hussle said, “Bitcoin balances the disadvantage people have with banks.”

While Blockchain technology is proving this statement to be true, Bitcoin investors who do not plan properly will encounter a different disadvantage –

Tax. Lot’s of tax.

Here are a few tax considerations investors should keep in mind before engaging in cryptocurrency transactions.

1. Taxable Events

Virtual currency is treated as property for tax purposes. This means, anytime you exchange cryptocurrency for real currency, goods or services, you might engage in a taxable transaction.

As you can imagine, tracking these taxable transactions requires specialized knowledge.

Crypto investors should seek out a tax professional like Charles J. Kelly, CPA, also known as “CJ The Smart Guy,” who has educated thousands of investors on the tax treatment of digital assets.

As the CEO of Smart Guy Consulting and a member of the Black Bitcoin Billionaire organization,  he educates his community about investing, generational wealth and tax planning.

Here is his breakdown of common cryptocurrency transactions:

  • If you buy = not taxable.
  • If you hold = not taxable.
  • If you borrow against = not taxable (note, loan interest paid might be tax deductible.)
  • If you sell, trade or buy goods and services = taxable.

Keep in mind, you can engage in taxable cryptocurrency transactions when real currency is not realized. Airdrops, mining, staking rewards, crypto-to-crpyto trades, and getting paid in crypto are also taxable transactions.

2. Capital Gains Tax

When you sell or exchange capital assets, including virtual currency, you engage in a capital gains transaction.
 

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CJ The Smart Guy encourages investors to buy Bitcoin and never sell. For those who do sell, he emphasizes that, “If you hold crypto longer than a year, you are taxed at a favorable long-term capital gains rate.”
 
Long-term capital gain rates range from 0%-15%. Short-term capital gains rates range from 0%-37%.

Identification Methods

CJ also helps investors legally obtain the most favorable tax treatment on their capital gains. When applicable, he uses one of  the following identification methods to determine the cost basis of each virtual asset:
  • First In, First Out (FIFO),
  • Last In, First Out (LIFO),
  • Highest In, First Out (HIFO), or
  • Specific Identification.

By identifying the most favorable cost basis, he helps taxpayers reduce the size of their capital gain. This minimizes the capital gain income subject to tax.

3. Reportable Events

Just because a crytpo transaction isn’t taxable, doesn’t mean it’s not reportable.

Let’s break it down.

Receiving, selling, sending, exchanging, or otherwise acquiring virtual currency are all reportable events.

Page 1 of Form 1040, Individual income Tax Return,  has a whole section regarding reportable Digital Asset transactions. If at any time during 2023, you

  • (a) received (as a reward, award, or payment for property or services); or
  • (b) sold, exchanged, or otherwise disposed of a digital asset (or any financial interest in any digital asset), 

You must report on your 1040 accordingly.

Keep in mind, if your only transactions were purchases of cryptocurrency with real currency, you are not required to answer “Yes,” to the Form 1040 question.

Large Cryptocurrency Transactions

Effective from January 1, 2024, individuals receiving $10,000 or more in crypto transactions are now required to report detailed information to the IRS within 15 days, facing the risk of felony charges for non-compliance.

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The reportable detailed information includes:

  • names,
  • addresses,
  • SSN/ITIN numbers,
  • amount paid,
  • date,
  • nature of transaction,
  • etc.

This reporting requirement which is detailed in IRC Section 6050I is not a new rule. It was originally part of an anti-money laundering bill dating back to 1984.

The recent update came through the Infrastructure Bill signed into law by President Biden, extending its scope to cover digital assets.

The application of 6050I primarily targets those involved in a trade or business who receive crypto receipts exceeding $10,000.

However, the definition of “trade or business” is broad and subject to interpretation, leading to potential complexities.

Factors such as the regularity and continuity of the activity, intent to make a profit, and the level of activity are considered by courts and the IRS to determine if an activity qualifies as a trade or business. While retail traders typically may not be categorized as a “trade or business,” challenges may arise for those engaging in frequent trading, running validator nodes, or participating in staking activities

In short, if you engaged in a crypto transaction that exceeded $10,000, walk through the facts and circumstances with your tax professional to determine if additional reporting is required.

4. Tax Documents

If you hire a professional to prepare your tax returns, provide these documents to accurately report your transactions:
  • Form 1099-K, Payment Card and Third Party Network Transactions
  • Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
  • 1099-MISC, Miscellaneous Information
  • 1099-DA, Digital AssetS (beginning tax year 2025), and/or
  • Transaction Report

If you own a Bitcoin ETF, you should receive one of the statements above and a Trust Tax Information Statement that provides supplemental information about your investment.

Contact your cryptocurrency exchange to retrieve the necessary tax documents.

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5. Foreign Reporting

If you plan to move your digital assets to a foreign account, hold them in a foreign entity or conduct any foreign transactions with cryptocurrency, keep in mind foreign reporting requirements.
 
Discuss any international transactions with your tax preparer before moving forward to ensure all compliance requirements can be met.

6. Cryptocurrency Donations

If you itemize your individual income tax deductions, you might get a tax benefit when you donate cryptocurrency to a qualified organization.
 
If you have philanthropic goals or have highly appreciated cryptocurrencies, a donation might be a good fit in your tax plan.
 

Conclusion: Six Tax Items Every Cryptocurrency Investor Should Know

After you and your tax professional have reviewed the tax implications of your planned crytpo transactions, you can structure your tax and investment plan accordingly.
 
Keep in mind, crytpocurrency and all digital assets are currently volatile assets. Digital asset values can rapidly rise or fall pending economic conditions, celebrity endorsement and many other factors. Consider diversifying your portfolio or working with a Certified Financial Planner to manage your risks accordingly.
 
Finally, crytpo enthusiasts should work with licensed tax professionals who are knowledgeable about all things crypto – mining, staking, HODL, etc.. Their specialized knowledge will help you prepare for taxable events, minimize your tax liability if possible and maximize your wealth transfer.
 
Want to know more about crytpocurrency? Check out the audio from CJ the Smart Guy’s podcast below:
 

Disclaimer:

The information provided on this blog is for educational and informational purposes only. While every effort has been made to ensure the accuracy and reliability of the content, we do not make any representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information.

Please note that the financial advice and information presented on this blog are not personalized to your specific financial circumstances. It is essential to consult with a qualified professional, such as a financial advisor or accountant, before making any financial decisions or taking any actions based on the information provided here.

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