One of the most common questions I receive as a tax professional is, "Are CryptoCurrency gains and losses taxable events?" . The simple answer to this is, yes. Gains and losses generated from the sale of CryptoCurrency are considered taxable events. The difficult part of this process is ensuring the gains and losses are treated correctly and in compliance with Internal Revenue codes. The purpose of this article is summarize and simplify what I have found to be the case in my time as a tax professional as well as to open up the comment section for discussion or further questions.
After much prodding, the IRS released notice 2014-21 in March of 2014 that answered many FAQs on the tax treatment of CryptoCurrency. The most crucial piece of information that in the eyes of the Internal Revenue Service CryptoCurrencys are considered Property NOT Currency. This is crucial to remember as, for most of us at this point in time, Cryptos are solely a store of value. This means, that CryptoCurrencys are considered capital assets for the vast majority of individuals. The select few that trade CryptoCurrecy as a job will treat the virtual asset as inventory which would be all ordinary income/loss.
Long term capital gains (gains on property held for longer than one year) receive preferential tax treatment by the IRS. As an example, let's say you fall into the 39.6% tax bracket, the highest tax bracket in the United States (Because, you know, us CryptoPeople are ballin'), the tax from the sale of your CryptoCurrency would only be taxed at 20% (assuming you held the property for longer than one year). As if we all didn't have the incentive already to HODL. now we have even more of a reason.
Short term capital gains (gains on property held for less than one year) are taxable as ordinary income. What this means is that the gain on the property sold is just as taxable as the wages you receive from your workplace -- there is no preferential treatment for short term capital gains. Additionally, net losses are capped out at a max deduction of $3,000 per year. For example, if you incurred $25,000 of long term losses and had $15,000 of short term gains. This results in a $10,000 overall loss for the year. You may only deduct $3,000 in the current year. The remaining $7,000 can be utilized in subsequent years but, again, only up to $3,000 may be deducted on any given year.
Gains and losses for tax treatment are calculated as the amount received in the sale of the property less the basis of the property. The basis of the property is simply the amount paid for the property plus fees or commissions. A gain occurs when the amount received exceeds the basis of the property sold. Vice-versa, a loss occurs when the proceeds received are less than the basis of the property sold. In the past, individuals have asked me, "Can I claim a deduction in my CryptoCurrencies were stolen?" The short answer is doubtful. However this is a topic that requires much more than surface level explanation which is the purpose of this article today.
If you don't report your income from CryptoCurrencies Donald Trump will be president for the next 20 years. Jk. But seriously, nothing good can come from misleading the IRS on your income. If you are audited or selected by the IRS' ISRP system and they find that you left income off your tax return there will definitely be additional tax assessed with interest. Additionally, if a large sum of money was left off your tax return and the IRS finds you willfully and willingly fraudulently filed your tax return a criminal prosecution could be in play.
Thanks for reading everyone! This is my first time to write an article for the public. Normally I only get to talk about tax and cryptos with interested clients and friends so this is exciting for me! Let me know your thoughts on the subject matter and ask any questions you may have. I know this is pretty surface level material that has been covered by many others but I plan to dive into more complicated topics such as Like-Kind exchanges and Casualty Losses and how they apply to CryptoCurrencies in the future if this article is received well.
