How Is Cryptocurrency Taxed in the US?

The deadline for filing tax returns in the US is fast approaching. April 15 is Tax Day, and if you have bought, sold, traded or otherwise received cryptoassets — you will have to take them into account when filing your taxes.

The process of actually filing the taxes can be arduous and complicated and we recommend you consult with a CPA or use bespoke crypto tax software such as BitTaxer to do so.

But how does the government actually relate to crypto in terms of tax?

In this brief, (non-exhaustive) article we take a look out how the IRS treats cryptoassets, what is considered a taxable event for crypto, and what some experts in the industry believe needs to change in terms of regulation.

How does the IRS classify cryptoassets?

When bitcoin and the other early cryptocurrencies were first created, it was unclear how this new class of currency or asset was to be treated in terms of tax.

In 2014, the IRS issued its official guidance with respect to what is considered a taxable event for cryptoassets.

In short, the IRS views “virtual currency” not as a currency, but as property:

“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”

This means that the IRS views your crypto holdings as they would any other asset like gold, stocks or real estate. While this does confer some advantages in terms of a better long-term capital gains rate, it does mean that the process for filing is more complex than for currencies, and the IRS expects you to keep track of all your crypto holdings, receipts, trades etc. as it would any other form of property.

What is considered a taxable event for crypto?

Without getting into the nitty-gritty of how to file your returns, here is a breakdown of what the IRS considers to be a taxable event. You are taxed for “realized gains” for any of the following events:

  • Trading out your crypto for fiat currency

Every time you have traded out your cryptoassets for fiat currency such as the US dollar — this is considered a “realized gain” (if you made a profit) and is a taxable event.

  • Trading between cryptocurrencies

Crucially, trading between cryptoassets, e.g. exchanging between bitcoin (BTC) and ether (ETH), is also considered a taxable event by the IRS. It is this type that creates the most problems for many cryptocurrency investors and traders — as they have to keep a record of the fair market value of all the different cryptoassets for every single trade at the time they traded them.

  • Receiving crypto from mining, airdrops or forks

Any cryptoassets received from miming rewards, from airdrops, or from forked cryptocurrencies — where holders of the original token instantly receive the new forked tokens as well — are also considered taxable events.

  • Receiving crypto as income, e.g., for a job

Any time you received cryptoassets as a salary, for jobs or any other crypto income is considered a realized gain.

  • Buying goods and services with crypto

Buying goods such as coffee with cryptoassets is also deemed a taxable event.

Importantly, just buying a cryptoasset such as bitcoin with fiat currency is not considered a taxable event (until you realize any gains in any of the ways above). Moreover, giving crypto as a gift, or just moving cryptoassets between wallets — are also not considered taxable events in terms of your personal returns.

Is current regulation fit for purpose?

As the cryptocurrency industry changes so rapidly, it is perhaps unsurprising that many within the sector feel that the regulatory stance towards crypto taxation need an update.

One such critic, from prominent cryptocurrency think tank Coin Center, believes that the IRS hasn’t done nearly enough to help those wishing to file their crypto tax returns.

Coin Center executive director Jerry Brito believes that the IRS has failed to issue clear enough guidance and therefore should not penalize those who make mistakes when filing their returns.

One particular area of ambiguity he draws attention to surrounds tokens received from forks. Crypto holders he argues, have little control of when forks occur, may not even claim the forked tokens, may not realize they have received the tokens, or may lack the technical knowledge to access them.

Examples like this lead Brito to conclude that:

“Until the IRS issues the sorely necessary guidance that tax practitioners has been clamoring for, confused taxpayers shouldn’t be penalized for being justifiably uncertain about how to report their cryptocurrency-derived income.”

While many in the space share this attitude, CryptoGlobe also recently spoke with BitTaxer President Brennan Snow about the current regulatory landscape, who — while acknowledging the problems, remains a little more optimistic:

“As it stands currently, I think it’s going to be tough to convince people to transact using cryptocurrency when each purchase made can have a capital gains implication. On the flip side, there was some clarity given in the 2018 tax bill as it pertains to like-kind exchanges and malicious losses, and lawmakers are beginning to introduce more legislation in the congress as they begin to understand the utility and potential in the cryptocurrency market. It seems a bit Byzantine as it stands currently, but having seen incrementalism at play in our government over the course of my lifetime, the fact that it remains a topic of conversation among legislators is encouraging.”

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.

About BitTaxer

BitTaxer provides a holistic and comprehensive tax solution for users to account for any type of virtual currency, cryptocurrency or digital asset transaction. BitTaxer gives special attention to the utility of Virtual Currency as both a capital asset and a method of exchange.

BitTaxer is the fastest, easiest, and most accurate way to calculate and file income, deductions, gains and losses from your virtual currency trades. CPA-Approved, live support, and all major exchanges.