Key Takeaways
- The IRS treats cryptocurrency as property, meaning that when you buy, sell or exchange it, this counts as a taxable event and typically results in either a capital gain or loss.
- When you earn income from cryptocurrency activities, this is taxed as ordinary income.
- You report these taxable events on your tax return using various tax forms.
- Keep records of your transactions so that you can inform the IRS of all your crypto activity during the year.
Cryptocurrency’s rise and appeal as an alternative payment method
Interest in cryptocurrency has grown tremendously in the last several years. Whether you accept or pay with cryptocurrency, invested in it, are an experienced currency trader or you received a small amount as a gift, it’s important to understand cryptocurrency tax implications.
The term cryptocurrency refers to a type of digital asset that can be used to buy goods and services, although many people invest in cryptocurrency similarly to investing in shares of stock. Part of its appeal is that it’s a decentralized medium of exchange, meaning it operates without the involvement of banks, financial institutions, or other central authorities such as governments.
Cryptocurrency has built-in security features. Transactions are encrypted with specialized computer code and recorded on a blockchain — a public, distributed digital ledger in which every new entry must be reviewed and approved by all network members.
You may have heard of Bitcoin or Ethereum as two of the more popular cryptocurrencies, but there are thousands of different forms of cryptocurrency worldwide.
Do you pay taxes on crypto?
People might refer to cryptocurrency as a virtual currency, but it’s not a true currency in the eyes of the IRS. According to IRS Notice 2014–21, the IRS considers cryptocurrency to be property, and capital gains and losses need to be reported on Schedule D and Form 8949 if necessary.
Despite the decentralized, virtual nature of cryptocurrency, and because the IRS treats it like property, your gains and losses in crypto transactions will typically affect your taxes.
How is crypto taxed?
If you buy, sell or exchange crypto in a non-retirement account, you’ll face capital gains or losses. Like other investments taxed by the IRS, your gain or loss may be short-term or long-term, depending on how long you held the cryptocurrency before selling or exchanging it.
- If you owned the cryptocurrency for one year or less before spending or selling it, any profits are typically short-term capital gains, which are taxed at your ordinary income rate.
- If you held the cryptocurrency for more than one year, any profits are typically long-term capital gains, subject to long-term capital gains tax rates.
