Cryptocurrency and Tax

As cryptocurrencies become an increasingly more integrated part of everyday life, many traders and tax professionals are asking themselves how to deal with the tax questions. Starbucks will begin to trail the acceptance of cryptocurrency payments in November this year, so there will definitely have to be some hard and fast rules put in place soon. However, the US tax authorities have not yet made any official statements to address the questions on cryptocurrency and taxes. Fortunately, there are already a few answers to be found from those who have taken the time to look into the matter.

A quick summary

For the uninitiated, the world of cryptocurrency can still seem slightly confusing. So if you have been hesitant to get into the crypto-trading game, then a bit of background might be helpful. Cryptocurrency was created in the wake of the 2008 financial crisis and gained in popularity due to the loss of trust in the mainstream banking system. Some of the earliest cryptocurrency tokens were Bitcoin and Ethereum. Since then, a multitude of different tokens like Litecoin, Ripple, Monero, and others have come into circulation. There are currently over 1,500 tokens on the market. Given that the market cap of the most popular tokens like Bitcoin is in the billions of dollars, questions about the taxation of trading in them will naturally emerge.

Cryptocurrency is currently treated as property

The term cryptocurrency is at the moment a bit misleading for tax purposes. The reason for this is that it is in fact considered to be property rather than currency. In other words, trading in cryptocurrency is more akin to trading in assets and real estate than it is to foreign exchange of fiat money.

Transactions are taxable

Any transactions made with cryptocurrency are taxable events and must be recorded in the same manner as other transactions. All receipts must be kept and included in the taxable income for the year. One can wonder if this means that businesses are able to expense business related transactions with cryptocurrency as well?

Taxes depend on the nature of the token

Whether or not the exchange of cryptocurrencies is taxable depends on what the given token means to the holder and taxpayer. For some, this can be a capital asset. For others, it can be property or inventory.

Cryptocurrency mining is taxable

Cryptocurrency mining is the process of validations cryptocurrency transaction in exchange for a proportional amount of that cryptocurrency token. Given that this is essentially providing a service in exchange for payment, it is considered a taxable income if you make a profit. In order to report these profits to the tax office properly, the fair market value of the cryptocurrency token needs to be added to your gross income. Whether or not you perform your mining activities as self-employed or as part of an organization needs to be reported as well.

Salaries and one-off payments can be taxable

If you are working for someone on a freelance or permanent basis and get paid in cryptocurrency, these payments could also be taxable. If the payment amounts to more than $600, then it should be reported to the IRS.

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