Do you own Bitcoin, Ethereum, or other cryptocurrencies and are now wondering if you need to pay tax on it? Maybe you’ve done some mining and you’re really not sure how to handle that?
If you’ve done some research, trying to decipher all the rules and conflicting information, you might have heard about IRS Notice 2014-21. This is the only real guidance issued by the IRS concerning cryptocurrency taxation so far and it said essentially, that crypto is to be taxed as property. There have been rules concerning the taxation of property for many years, so that notice just clarified which set of currently existing rules must be followed.
Purchase of Crypto – Just buying property doesn’t mean you owe tax. It’s only when you convert it to something else that creates a taxable event. If you convert it to fiat (sell it for cash), you will need to report that and will either have taxable gain or a loss. If you use it to purchase items directly, like using it at Starbucks, Overstock.com, or buying a pizza with it, that creates a taxable event. If you trade it for other crypto on an exchange or anywhere else, that’s also a taxable event.
Cryptocurrency Mining – If you mined crypto, you are generally considered to be running a business. Your “income” is the crypto that you successfully mined, and it’s the same as in any other business that receives property in exchange for the work they do or for the items they sell. Their income is the USD value of the property received at the time they received it. That would commonly be called bartering income. You could also think of it similar to a traditional mining business where they are digging gold or some other thing from the ground. They owe tax based on the value of whatever they extracted from the ground. The great thing is that you can also deduct any costs that you had in your mining business.
There are some details that aren’t directly addressed in IRS Notice 2014-21, like 1031 exchange deferral, different valuation methods like FIFO, LIFO, HPFO, and wash sales. We here at Know Tax LLC in Westerville, Ohio have been helping our clients take the best possible positions concerning their crypto taxation for years and have helped them pay as little tax as possible. We can help you too. Just visit our home page at Know.Tax and click on the “Schedule an Appointment” or “Get a Quote” buttons to learn more.