Most cryptocurrencies are used to store value, a medium of exchange, and a unit of account. This means they can sometimes be substituted for real money and can earn income or profits when traded. If you earn income or profits from cryptocurrencies, you could already attract taxes, which you must settle as you wrap up your business’s financial year.
There’s a lot to unpack regarding how cryptocurrency is taxed, but it’s important to know when you will be taxed so you’re not caught unawares when the IRS comes to collect. Here’s what you must know about cryptocurrencies and tax.
Cryptocurrency is Taxed Under Special Circumstances
The IRS categorizes cryptocurrency as a digital asset, which is taxed under the following circumstances:
- If you receive payment in the form of cryptocurrency, it’s viable for taxation as a business income.
- If you sell or use your crypto in a transaction and the cryptocurrency turns out to be worth more than when you purchased it, you pay taxes on the cryptocurrency. The IRS considers using or selling an asset a taxable event.
- If you’re awarded a cryptocurrency for work done on a blockchain or successfully mine it, you’ll pay taxes for it as you do for ordinary income.
Regardless of the circumstance you find yourself in, you can still save on taxes with a tax-advantaged crypto IRA. Enjoy crypto transactions without worrying about incurring a lot more additional taxes.
When is Cryptocurrency Not Taxable?
Your crypto transactions may not always be taxable in several circumstances, such as:
- When you receive crypto as a gift: You won’t pay taxes for any cryptocurrencies sent to you as a gift until you sell them or invest them in another taxable activity like staking.
- When you pay cash for crypto and hold it: As long as you hold your crypto, it remains untaxed, especially if you paid cash for it. Taxes only come in when you sell and some gains are realized.
- When you transfer crypto to yourself: If you have different crypto accounts and transfer crypto between them, the transactions don’t qualify for taxation. When transferring your crypto to different accounts, transfer the original cost basis and date acquired to track your potential tax impact when you finally sell your crypto.
- When you donate crypto to a qualified non-profit or non-exempt charity: You will not be required to pay taxes for crypto donations you make to organizations described in section 501(c)(3) of the Internal Revenue Code. These organizations are majorly charitable and are eligible to receive tax-deductible contributions.
- When you gift someone crypto: If you’re looking to gift someone some crypto, you can send up to $19,000 per year per recipient without worrying about owing taxes. If you transfer a gift above this limit, you must file a gift tax return. A crypto transfer is regarded as a gift when transferred to someone outside of a purchase for goods or services.
Whether you’re starting your crypto ownership journey or are looking to expand your digital assets, learning about the tax implications is helpful. By learning about circumstances when your crypto is and isn’t taxable, you can optimize your profits and successfully increase your asset base.
