Cryptocurrency was created in the aftermath of the 2008 Financial Crisis as a result of the bailing out of Big Banks and Business that were deemed too big to fail… despite their business practices that were, let’s say, “Misguided”. Since its creation in 2009, cryptocurrency and virtual assets have experienced exponential growth in adoption and utility. As such, more and more people/businesses/governments are getting into it as a speculative investment and/or a hedge against monopolistic nation states and the devaluation of their fiat currencies (see inflation).
With more people getting into crypto (and the incredible price appreciation as a result) it has certainly gained the eye of the IRS and other regulatory agencies who want a piece of the action.
So What Does the IRS Say About Crypto?
The IRS uses a very broad term to determine whether a person owns virtual currency. Using IRS Notice 2014-21, virtual currency is defined as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Any asset with these characteristics, “regardless of the label applied… will be treated as virtual currency for federal income tax purposes.”
Within this notice, the IRS issued formal guidance on how crypto should be taxed and applied general principles of tax law to determine that virtual currency is property, not currency. This means the crypto taxes you pay are the same as the taxes you might owe when realizing a gain or loss on the sale or exchange of a capital asset…think stock sales.
So What is Considered a Taxable Event?
Buying and HODL’ing is not a taxable event. The only time that crypto can be taxed is when it’s earned, airdropped, sold, exchanged, or used to pay for goods and services….(side note: Don’t get wrecked, Please only use stable coins to buy goods and services)
Taxable as Capital Gain/Loss: Disposition Price x amount disposed – Acquisition Price x amount disposed
- When you sell or trade crypto for Cash
- When you sell or trade crypto for another crypto
- When you spend (not stable coins)
Taxable as Schedule C (Small Business)
- Mining/NFT Creators/Short Term Rental of NFT Function
- NFT Creators
- Keep in mind, you are able to take expenses against the production of that income, so not all of it is taxable. Only the profit (Income – Expenses)
- Types of Expenses that could be applicable:
- Rent of space
- Purchases of Equipment
- Utilities/Cell Phone/Internet
- Subscription to communities and publications
Receiving Interest and Airdrops are taxed as ordinary income – not subject to Self-Employment Tax
- Airdrop – Airdrops are most often used as a marketing ploy to gain awareness of a new coin. This new coin can magically appears in your crypto wallet if you hold a certain other crypto.
- Interest – From the likes of Celsius, BlockFi, and Voyager paid in crypto is treated as an Airdrop.
These are just a few of the more common ways to create a taxable event in the cryptoverse.
Fleming Tax, will take your records, and remit those to the IRS. We are happy to consult with you about the tax consequences of any particular action, but the burden of proof will rest with you. We very strongly recommend using the services of a zenledger.io or cryptotrader.tax to help track your activity through DEX’s, NFT marketplaces and DeFi.
Request to schedule an appointment to discuss and to have a crypto conscious preparer to help you with your taxes!
Crypto Tax Prep Fees:
With Crypto being a very specialized and complex tax realm, additional fees are incurred if you have them on your return. The fees are based on the level of Degen.
Laser Eyes (Tier 1) – + $250 on top of tax prep fee
All Crypto held in an exchange, only interest/airdrops and sales from Crypto to US Dollars. Clear and concise tax documentation provided.
White Rabbit (Tier 2) – + $1,000 on top of tax prep fee
Tier 1 plus Staking outside of exchange, Sales from one Crypto to Another, NFT HODL’ing
Red Pill (Tier 3) – + $2,500
Crypto all over the place, including but not limited to DEX’s, LP’s, Rebasing (DeFi 2.0), Transacting IRL with Crypto, NFT Creation/Leasing, Metaverse Immersion.