There’s a lot of confusion when it comes to the way virtual currency is taxed in the US. The way crypto is taxed isn’t really new and the tax code has been that way for many years, but it feels a little different for crypto because that’s new and confusing to many people. There are also a few details that have been clarified by the IRS.
When you buy and sell crypto, it’s generally treated the same as other property that’s bought and sold for investment purposes, like a building. If you sell it for more than you paid for it, you owe tax on the capital gain. If you sell it for less than you paid for it, you can take that loss against some other income. It’s also not much different than trading stocks. It can get very involved though, when you have many different trades, especially when you buy a certain amount, then only sell a portion of it. You still need to keep track of what the remaining portion of the crypto was purchased at, so you can get credit for the amount paid when you eventually sell it.
The issue that we see causing the most confusion is when you have crypto in an exchange or something similar, and you trade it for another type of cryptocurrency or maybe cash it out for fiat (dollars), but leave the money in the exchange. This is a taxable event and must be reported on your tax return, but it doesn’t necessarily feel like it should be, because you haven’t actually received any money in your hands.
When trading for another type of crypto, it’s essentially a sale, but instead of receiving dollars for the sale, you receive another crypto, so you’d consider the amount received for the sale to be the dollar value of the new crypto at the time of the trade.
When selling your crypto, but leaving the money in the exchange, it would be similar to selling property to someone and receiving a check in payment, then depositing that check and leaving the money in your bank. The exchange acts as your bank in the crypto sale. You have access to the money, but it doesn’t necessarily feel like it until you take it out of the exchange and have the cash in your hands.
If you’d like a little more detail on how the IRS chooses to tax crypto, you can read the first guidance that they gave in 2014 here: IRS Notice 2014-21 or read through their current Frequently Asked Questions on Virtual Currency Transactions.
If you’re having tax trouble that you’d like us to evaluate for you, please visit our website at www.ohiotaxrescue.com or call us at 614-636-1040