How Taxes Work with Cryptocurrency

Cryptocurrency may feel like a new phenomenon to a lot of people, but the concept actually dates all the way back to the mid-2000s. You might remember hearing brief conversations and reports about Bitcoin in those times, but the market has EXPLODED since then.

Over this timeframe, millions of people have invested in and profited from different cryptocurrencies. The time has also allowed the Internal Revenue Service (IRS) to catch up and apply tax laws to the market. If you’re already investing or considering investing in crypto, we have some tax rules you’ll need to keep in mind.

NOT TAXED: crypto purchases with real U.S. currency

If you are simply purchasing crypto and storing it on the service where you purchase it (or transferring it into your own personal wallet), you will not have to report this to the IRS. This means you can purchase and hold crypto without paying taxes as long as the purchases are made with actual U.S. funds. The next steps you take with your crypto will determine how taxes apply.

TAXED: selling crypto for real U.S. currency or other forms of crypto

Once you start making transactions with the crypto you’ve purchased, the IRS will want their cut. The taxes apply in various ways. For instance, you will be taxed based on the real market value at the time of your sale (not based on what the price was when you purchased it). You will also be taxed on the difference between what you paid and the actual value, similar to a “capital gains tax.” The increase in value of an asset over time will be taxed once those gains are realized and not sooner.

This will apply to when you flat out sell your crypto or exchange it for other forms of crypto. Crypto exchanges can happen frequently, and if you’re active on the market you should be ready to spell out the complicated nature of those exchanges along with paying the taxes that come with them.

NOT TAXED: gifting cryptocurrency

This applies to both parties involved in the gifting process. If you decide to give some of your crypto balance as a gift to someone or they decide to gift it to you, taxes will not apply immediately. Similar to the purchase process, the taxes will only be incurred to the party who eventually decides to sell or exchange the crypto.

You can also donate crypto to a qualified tax-exempt charity. This situation also means you and the receiving organization will not be immediately subject to taxes.

TAXED: buying or selling goods and services using crypto

Whenever you make a purchase with crypto, you’re buying the good or service based on the current value of the currency. This value will be reported to the IRS and taxed applicably. And, as mentioned before, if there is a difference between the value of the cryptocurrency and the time you purchased it, you will be subject to a capital gains tax.

The same applies to when you sell a good or service for crypto. This could include even having your employer pay you out in crypto. This option could be an appealing way to build up your coinbase, but you will need to pay income taxes based on the crypto you are receiving.

At Waserstein & Nunez, we believe in being adaptable to the market and understanding tax laws as they apply in new ways. We understand the desire to get involved in the cryptocurrency market, and we want to protect your prosperity. Contact us today if you have any questions about your financial situation.

 

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Waserstein & Nunez, PLLC

Waserstein & Nunez, PLLC is a boutique law firm with extensive and varied experience of a large law firm. They are geared towards deal-making and solutions but always preparing and ready for trial or Plan B.

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