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What to know about cryptocurrency and taxes

On Behalf of | Mar 24, 2021 | Tax Law |

Cryptocurrency has become an extremely popular way to buy and sell goods and services. It has also become an enticing investment opportunity for many new investors. However, as the world becomes more and more interconnected, cryptocurrency has taken center stage. Many people fail to realize that there are numerous tax consequences that are associated with cryptocurrency. 

To help clear up some confusion surrounding cryptocurrency, this blog will detail the rules you need to know about paying taxes on your crypto transactions.

IRS regulations and cryptocurrency

Cryptocurrency is a type of virtual currency that uses cryptography to secure a transaction that is digitally recorded on a distributed ledger. According to the Internal Revenue Service (IRS), cryptocurrency must be included in your taxes. These regulations indicate that cryptocurrency gains are taxed as property similar to real estate assets. Typically, you have a capital gain whenever you have a taxable spend, income or sale. 

Cryptocurrency transactions: when you need to file taxes

When you are dealing with cryptocurrency, there are various scenarios you need to watch out for that can result in you having to file taxes. They include the following:

  • When you trade cryptocurrency for cryptocurrency
  • When you spend cryptocurrency on services 
  • When you spend cryptocurrency on goods
  • When you sell cryptocurrency for fiat
  • When you have cryptocurrency as income, such as staking or mining, receiving hard forked coins or airdrops, DeFi income or being paid in cryptocurrency

Cryptocurrency transactions: when you do not need to file taxes

In addition, it is also essential to understand when a particular cryptocurrency activity is not taxable. For instance:

  • If you are buying cryptocurrency with fiat
  • If you are giving cryptocurrency as a gift (however, specific amounts may be subject to a federal gift tax)
  • If you are transferring cryptocurrency between wallets or exchanges 
  • If you are donating cryptocurrency to a tax-exempt charity or organization

What happens when you do not pay taxes on your cryptocurrency transactions

Even though there are numerous reasons why individuals do not report or pay taxes on their cryptocurrency transactions, it is important to understand that the IRS is cracking down on these taxpayers. In fact, last year, the IRS sent notices to more than 10,000 taxpayers who had virtual currency transactions, but did not report or pay federal income tax gains on them. Why is this a big deal? Because failing to report cryptocurrency transactions correctly can result in a taxpayer owing additional taxes, interests, penalties and even criminal prosecution.