The Tax Rules Around Cryptocurrency

The Tax Rules Around Cryptocurrency

August 10, 2021

As if IRS policies weren’t confusing enough, we now have “virtual currency” to contend with as well as traditional cold hard cash. If you’ve entered the arena of cryptocurrency, you may be asking, “How does investing in virtual currency affect my taxes?” We have answers. Here’s what to know about taxes for cryptocurrency:

  • Capital assets: If you hold Bitcoin as a capital asset, it is treated as property for tax considerations. That means tax principles for property transactions apply.
  • Gains and losses: If you have any gains or losses from exchanges or sales, you will be taxed on these transactions as capital gains or losses. You’ll pay regular tax rates of up to 37 percent for short-term capital gains (assets held less than one year). Long-term capital gains (assets held longer than a year) are taxed at rates of zero, 15 and 20 percent.
  • Reporting: If you “mine” Bitcoin and have earnings from this activity, you must include these earnings in your reporting to the IRS. You must determine the fair market dollar value of the Bitcoin when you received it and include the total as part of your gross income.
  • Gifts: When cryptocurrency is received as a gift, it must be treated the same way any other monetary gift is treated for tax purposes. If the gift is over $15,000, it can be subject to gift taxing. However, there may be ways to avoid this gift tax. Consult with your local tax expert to learn about possible exemptions.
  • Inheritance: If you inherit cryptocurrency, the IRS treats this just like other capital assets that are inherited. The inheritance may be subject to estate taxes, depending on the value of the cryptocurrency.
  • Businesses: If you mine cryptocurrency as a business, you may be eligible for deductions. You may be able to deduct expenses just as any other type of business would. However, you must be operating a business to qualify for these deductions. You may not mine as a hobby and take advantage of these deductions.
  • Tax returns: With the rise of cryptocurrency use, tax returns are now including these earning methods as part of the basic forms. As you file your taxes, you’ll encounter a question that asks if you “received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency.” You must answer this question honestly to avoid legal issues. However, if your only cryptocurrency transactions were to purchase virtual currency with real currency, you do not have to answer “yes” to this query.
  • Experts: Fortunately, you aren’t on your own as you try to figure out an answer to the question, “How does investing in virtual currency affect my taxes?” Simply contact your local tax experts to get professional insight.

Get tax support for cryptocurrency

At Kedean’s Generation, we pride ourselves in our customer service and our knowledge. We specialize in what to know about taxes for cryptocurrency, income tax preparation, accounting, notary public, business registration and more. Contact our experts today with any questions about cryptocurrency or tax filings. We’re here to help!

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