There are only two certainties in life: death and taxes. Even for cryptocurrency

Nobody knows when cryptocurrency will die, but let's talk about how it's taxed.

Defining Cryptocurrency For Tax Purposes

  • Cryptocurrency is treated as a commodity and not like a government issued currency

  • Commodities hold an adjusted cost basis (all costs to acquire) that is determined when mined or received as compensation

  • Commodities when sold are classified as a Capital (property held for investment or personally) or Business (done through normal course of business activity) transaction

When Do I Need To Pay Tax On Cryptocurrency?

Holding cryptocurrency does not have any tax implications, but the following do:

  • Selling of or gifting cryptocurrency

  • Trading or exchanging even for other forms of cryptocurrency (e.g. Bitcoin exchanged for Doge)

  • Buying good or services with cryptocurrency

  • Conversion of cryptocurrency to government issued currency

Capital Transaction

  • Capital gains/loss on tax return

  • 50% is taxable

  • Losses can only reduce capital gains

Business Transaction

  • Business income on tax return

  • If sole proprietor can deduct losses from other income

  • Loss carryforward (applying previous years losses to other years gains) can apply

Quiz

Which of the following does not require declaration in your income taxes for the current year?

Buying a car with your Bitcoins

Exchanging your Bitcoins for Ethereum

Selling your Bitcoins for cash

1 Bitcoin that was mined 2 years ago

How Much Tax Do I Owe?

The gain or loss from the transactions that trigger taxation is derived from the following

Selling Value

  • Sale price

  • Compensation for property destroyed, expropriated, or stolen

  • Value of traded property

Purchase Value (Adjusted Cost Basis)

  • Purchase price

  • Commission fees

  • Legal fees

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This Byte has been authored by

ES

Ervin So

Numbers Guy