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?

Selling your Bitcoins for cash

Exchanging your Bitcoins for Ethereum

Buying a car with your Bitcoins

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