Trading Cryptocurrency and Taxation


Tax Implications from Trading Cryptocurrency

The Internal Revenue Service has stated that virtual currency transactions are taxable by law.  The IRS issued its first and only guidance on the taxability of cryptocurrency in 2014.  The guidance states that for tax purposes, cryptocurrencies are not really currency, and should be treated as property.

For IRS purposes, virtual currency should be treated in a similar manner as stocks and bonds.

For those taxpayers buying and selling cryptocurrency as an investment, calculating gains and losses are figured the same as buying and selling stock. That's true, as well, when it comes to basis, holding period and a triggering event. 

So, if you have purchased cryptocurrency but haven't sold it, you haven't realized any tax gains that need to be reported to the IRS.

Figuring Tax on Virtual Currency Trades

For most virtual currency trades, you will not receive a tax form (like a 1099 form), as you normally do when trading stocks or bonds.  Therefore, it is imperative that you keep accurate records of purchase and sale dates and amounts.

Like stocks, every time you trade your cryptocurrency, even if it's for another cryptocurrency, you incur capital gains or losses. If you purchase goods or services with virtual currency, that is also considered a "sale" for tax purposes.

Short-Term vs Long-Term Capital Gains on Trades

If you sell specific virtual currency that you have owned for less than a year, it is treated as a short-term capital gain.  Short-term capital gains are taxed as ordinary income, which means your gain will be calculated at your regular margin tax rate.

If you have held your cryptocurrency for longer than a year before selling, it is considered a long-term capital gain.  Long-term capital tax rates are generally significantly lower than ordinary income rates.

The IRS and Cryptocurrency

The IRS has been cracking down on cryptocurrency trading.  This can be seen in their success in legal efforts to force Coinbase to turn over customer records.  With the tremendous growth of virtual currency, it's inevitable that the IRS will continue to expand their efforts in making sure that tax liabilities are being properly reported and paid.

Need Help with Virtual Currency?

If you own cryptocurrency (or have in the past)  and are not sure of your reporting requirements, please contact our office to schedule an appointment.