Crypto Taxes: Tax Reporting Requirements
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.
In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.
When Do You Owe Taxes On Your Crypto?
As seen in the IRS virtual currency guidance, the following are all considered taxable events for cryptocurrency:
- Trading crypto to fiat currency like the US dollar
- Trading one crypto for another cryptocurrency
- Spending crypto to purchase goods or services
- Earning crypto as income
When Don’t You Owe Taxes On Your Crypto?
You do not trigger a taxable event when you:
- Buy and hold crypto
- Transfer crypto from one wallet you own to another wallet you own
How Do You Calculate Your Crypto Taxes?
To calculate your capital gains and losses from each of your crypto sells, trades, or disposals, you simply apply the formula:
Fair Market Value – Cost Basis = Capital Gain/Loss
In the absence of instructions, the IRS assumes first in-first out (FIFO), which, in the case of a digital asset that has risen over time, can result in the largest taxable gain. For that reason, it’s a good idea to make certain that you keep written confirmation of the specific crypto assets that you are selling.
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Daniel Ahart Tax Service®
21 Eastbrook Bend, Suite 119
Peachtree City, GA 30269
Fax (770) 897-4730