There is no doubt that cryptocurrency has taken the financial world by storm. From Bitcoin to Ethereum, these modern currencies have become a popular choice not just for investments but even as a mode of payment. So, how is our tax system adjusting to this seismic shift in financing?
Does the IRS impose a tax on crypto?
The short answer is yes. The IRS treats cryptocurrencies as property, like stocks or real estate. Because of this treatment, any cryptocurrency transaction can trigger a taxable event. These can include the following:
- Selling cryptocurrency: If you sell your cryptocurrency for more than you paid for it, you have a capital gain, which is taxable. Selling it for less can offset other gains.
- Trading cryptocurrency: The IRS requires reporting the fair market value of a cryptocurrency at the time of the trade.
- Using cryptocurrency for purchases: You must report the transaction when you use cryptocurrency to buy goods or services. The difference between the purchase price and the value of your crypto at the time of the transaction can be considered capital gain or loss.
- Crypto as payment: If you receive cryptocurrency as payment for goods or services, it is considered income. In other words, it can get taxed and must be reported at its fair market value at the time of receipt.
These are just some of the many other ways that your cryptocurrency can get taxed. So, understand your tax obligations to avoid surprises come tax season. Keep a detailed record of all your transactions and consider consulting with a tax professional to ensure you won’t get any penalties.