Jurisdictions around the world are increasingly making moves to tax gains made from cryptocurrency transactions – just like they would tax capital gains made from selling property at a profit or trading gold. In the United States, for example, cryptocurrencies are generally treated just like any other form of property and are subject to both short- and long-term capital gains taxes. For people with significant holdings in cryptocurrencies, that could translate into a significant tax bill. Wondering what you should know about cryptocurrencies and taxes? Let’s take a look.
Buying cryptocurrency is not a taxable event.
First of all, just having cryptocurrency isn’t, in itself, taxable. If you’ve bought cryptocurrency using US dollars but haven’t actually done anything with it and it is still sitting your wallet, then you likely don’t owe tax.
Wallet-to-wallet transfers and gifts are not taxable events.
If you give cryptocurrency as a gift to, say, your significant other or sibling, then it isn’t taxable. The caveat to this is if the amount you give exceeds the taxable gift limit set out by the IRS. In that case, the recipient will have to pay tax on it (and if he or she sells the cryptocurrency down the line, he or she will have to pay capital gains tax). You can also make transfers or exchanges between wallets without incurring tax.
If you’re trading cryptocurrencies, then you probably owe tax.
However, if you’re trading your cryptocurrencies into dollars – or any other fiat currency for that matter – then chances are high that you will probably owe tax. Essentially, anything other than buying, holding, or transferring cryptocurrency is taxable. You are also like to owe tax if you trade one cryptocurrency into another cryptocurrency or if you use cryptocurrencies to buy any kind of goods or services. These transactions need to be declared, and you will probably owe long-term or short-term capital gains tax depending on the specific circumstances, including, for example, how long you held onto the cryptocurrency before you traded it.
But is increased regulation leading more people to pay taxes on their cryptocurrencies? Well, not necessarily, it would seem. According to recent research conducted by the credit-monitoring group Credit Karma, out of the first 250,000 individual tax filings in the US, just 100 declared any cryptocurrency assets. In other words, less than half of a percentage point of all cryptocurrency traders pay taxes to the US government.
The bottom line is when it comes to cryptocurrencies and taxes, it is much better to be safe than sorry. Failing to declare your cryptocurrency-related capital gains could constitute tax evasion. If you have any questions or need help preparing your tax filings, your best bet is to consult a professional.