After years of consultations and email threads, it has become clear to me that there is a general state of confusion regarding the different types of crypto trading activity, and the taxability of each one. It’s an understandable confusion, because crypto trading and investing has evolved into many forms over the past decade, and IRS guidance on the taxation of these activities is (and always will be) constantly playing catch-up.
The goal of this post is to identify the most common crypto-currency activities, and the tax treatment for each one. Please note that this is not an exhaustive list of crypto investment activities. This is the shallow end of the crypto-taxation pool.
1. Buying a crypto currency with USD.
This is not a taxable event. It’s important to keep track of these purchases, though, because these become your basis when you sell or trade the coin in the future. The only time that the sole act of purchasing crypto currency must be reported to the IRS is when they are held in a foreign exchange and fall under the reporting requirements for foreign-held assets. More on that later.
2. Selling crypto currency for USD.
This is an obvious one. Whenever you sell crypto, you’ll have to recognize a gain or loss on that sale. It doesn’t matter if that crypto was gifted to you, purchased, mined, or received as a reward for staking. You’ll be taxed on the gain.
3. Buying crypto currency using another type of crypto currency.
Trading one crypto currency for another is treated as the sale of whichever currency was given up, which is taxable. Say, for example, you purchase 100 LTC for the price of 0.5 BTC. This is technically treated as the sale of the 0.5 BTC, which is taxable and must be reported on your tax return. The gain/loss would be equal to the value of those 0.5 BTC at the time of sale minus the cost of those 0.5 BTC when originally purchased. That gain or loss may be short-term or long-term depending on how long those 0.5 BTC coin were held.
4. Mining crypto currency.
This is taxable. It is essentially treated the exact same as interest you earn from your bank. It is not a capital gain, and it is taxed at the ordinary income rate, just like your wages. You will recognize ordinary income equal to the value of the crypto currency at the time you gained possession.
There is another taxable event when you sell or trade the crypto currency that was previously mined. Just like any other sale, you’ll recognize a gain or loss equal to the difference between the sales price and your basis in the coin (the basis being the value when it was mined).
5. Staking crypto currency.
Rewards (or sometimes called interest) from staking your crypto currency is treated the exact same as mining it. The crypto you receive as payment is taxable as ordinary income, and there will be a gain/loss recognized when you dispose of that crypto.
6. Receiving crypto currency as a gift.
This event alone is not taxable. Many people incorrectly assume that gift tax is something we all must pay when we receive property as a gift. It is the other way around. Gift givers are responsible for gift taxes. Even then, they aren’t required to report any gifts under for $15,000 for 2020, and won’t pay taxes on those gifts until they exceed their lifetime exclusion of $11.58 million.
However, just like with mining and staking, there is tax to be paid when you sell that gifted crypto. You’ll recognize a gain/loss depending on how the value of that crypto has changed since you received it as a gift.
7. Forks and Splits.
This is not a taxable event. When your crypto currency goes through a 2:1 split, you do not owe taxes on that. The quantity of crypto coins you hold doubles, and the basis you had in each one halves. It is not considered a sale. The same logic applies for a reverse split.
8. Using crypto as collateral to obtain a loan.
Not taxable. You are offering up your crypto as collateral should you default on the loan, but you are not selling or disposing of that crypto. It’s pretty much just a normal loan for tax purposes.
You are not alone. There are many more complicated crypto investing activities, and they all have more complicated tax issues. It’s worth contacting a crypto tax professional to get assistance with your crypto taxes.