Cryptocurrency is considered “property” by the federal government, which means its owners would have to pay taxes on cryptocurrency itself before it can be used as a method of payment. In 2021 the IRS seized $3.5 billion worth of cryptocurrencies, accounting for 93% of all the assets seized by tax enforcement for the fiscal year. Tax Network USA provides a full spectrum of services to properly report and protect our client’s cryptocurrency.
Cryptocurrency is considered property, not currency, for US tax purposes. Therefore, the taxation of cryptocurrency exchanges will be treated differently than if it was currency.
Here is an example of the difference between property versus currency for tax treatment:
If Evan goes to the store with $200 and purchases something for $55, the transaction is relatively simple. Evan gives the clerk $200 and receives the product as well as $145 back. The product is worth $55 and that will be the adjusted basis (aka the original cost) for the product.
Instead, if Evan has crypto worth $10,000 that he exchanges for a new crypto valued at $10,500, then Peter has a $500 gain. In other words, Evan exchanged an asset that was worth $10,000 and received another asset worth $10,500. That new asset in Evan’s hand is worth $10,500. Presuming it was an arms-length transaction, the general rule would be Evan has a $500 gain that he would need to report on his tax return for the current year. When Evan goes to sell or transfer the new asset, it will be worth $10,500.
As you can imagine, when a person has hundreds, thousands, or even millions of crypto exchanges in a single year — the tax ramifications can be daunting.
Yes. If your cryptocurrency was sold or exchanged, it is generally reported on Schedule D while incorporating form 8949 to identify each transaction. If instead the crypto was received for employment purposes, then it would be reported as income. In other words, the crypto is reported based on the category of income represented by the crypto transaction.
Mining is the concept of researching transactions and updating public records with the hope of receiving crypto because of the hard work performed. The process is similar to mining for gold. It may start out as a hobby but if income begins to generate, then it is generally going to be taxable at the time it is sold or exchanged.
A few years back, the IRS sought to issue a summons against Coinbase, one the largest international cryptocurrency exchanges. Coinbase fought the summons but at the end relented and provided information for more than 13,000 account holders to the Internal Revenue Service.
