Cryptocurrency Tax Events
There are a number of events in your life that are likely to generate taxable events. It is important to understand the tax implications of those events so you can organize your finances and minimize your tax exposure. The U.S. has rules on taxable events for both investors and individuals. Common taxable events include times where you receive wages subject to income tax, when you realize capital gains (i.e. sell an investment for profit), or receive investment dividends. For cryptocurrency enthusiasts, taxable events occur when one type of crypto is traded for cash or another cryptocurrency. Please seek an independent and personalized tax professional for financial advice before making any financial decision.
Everyday Taxable Events
During tax planning, it is important to consider timing of various taxable events that can result in different tax liabilities. There are a number of everyday occurrences that have tax implications. For example, wages, dividends, and profits earned are categorized as fixed taxable events. Sales of investments or bonuses are categorized as variable taxable events. When it comes to variable taxable events, it is important to pay proper attention to the timing of their execution as this can greatly reduce your tax liability.
Taxable Events in Cryptocurrency
In the USA, crypto is treated as property. As a result, all crypto transactions and trades are taxable events. This treatment has caught people off-guard as the general perception in the market prior to IRS clarification was that crypto could be classified as a currency. As a result, in the USA, trading one cryptocurrency for another is equivalent to selling one asset and buying another. Therefore, a capital gain (or loss) must be recorded and claimed on your taxes. Cost basis for that particular crypto purchased is strictly calculated based on its fiat value at the time of trade. It is, however, important to note that fiat to crypto conversions (i.e. buying cryptocurrency) are not taxable events. Selling your crypto is what triggers a tax liability.
Taxable Events from Earning Crypto
There are a number of ways people earn crypto. For example, cryptocurrency holders can earn crypto from anything from mining to wages for services. Taxes on earned crypto are similar to taxes on earned income, though not in all cases.
Taxes from Accepting Crypto as Payment for Goods or Services
Some people incur taxable events upon receiving cryptocurrency in exchange for provided goods or services. This happens when you accept payment in cryptocurrency for goods or services rendered. There are a growing number of people accepting their wages in cryptocurrency. For those individuals, all you’ll have to do is simply calculate the value of your wages at the time of payment to determine your tax bracket. Having said that, you must not forget that crypto is technically property (an asset) and not a currency. Any appreciation or depreciation of your crypto will have tax implications.
Taxes on Crypto Mining Earnings
Cryptocurrency miners are taxed based on the scale of their earnings. The tax amount, tax bracket, and other modifying aspects are purely dependent on how much their operation earns in a given tax period. Taxation in this case becomes a matter of whether you are mining enough for it to qualify as a business or your mining as a hobby or side hustle. It is recommended that miners seek professional tax help before making any financial decisions since their unique position in the tax system will require individualized advice.
Taxes on Crypto from Airdrops or Hard Forks
Receiving ‘free’ money in the form of Airdrops or hard forks can have all types of tax implications. It is an open question as to whether receiving tokens in this fashion is to be considered income for tax purposes. If at some point in the future airdrops and hard-forks will be held as a taxable income, then the Fair Market Value (FMV) will be left in-charge of determining your income at the time of the Airdrop or Hard-Fork. Alternatively, the more likely scenario is that these tokens will be received as a zero cost basis asset, and then you will need to pay capital gains on the profit earned at point of sale. Regardless, you will have to keep track of these token sales from a tax perspective. We recommend seeking individualized professional tax advice for your situation before making any financial decisions.
How to Calculate Taxable Events from Your Cryptocurrency
One of the hardest parts about claiming your cryptocurrency on your taxes is adding up all of your trades accurately and calculating your taxable events. myCryptoTaxCalculator is a simple and easy to use tool that helps you keep records of your taxable transactions and calculate your total capital gains for tax time.
Their software makes it easy to automatically import your transaction history. They support over 65 exchanges, decentralized exchanged (DEXs), ICO’s, OTC trades, and Airdrops. Their packages range from $59 to $129 and provide a variety of services. Visit myCryptoTaxCalculator to learn more.
Please seek an independent and personalized tax professional for financial advice before making any financial decision.