Tax On Crypto Transctions

This article describes income taxation of cryptocurrency transactions. As always, this is not investment advice.

From reading and watching the news, you might be under the impression that owning cryptocurrency is somehow frowned upon by the IRS.   This is nonsense!  After all, we do live in America and still have the freedom to own most any asset we wish -- and,  as long as we meet our tax obligations, there is nothing to fear.  Even the current Chairman Of the Security Exchange Commission, Gary Gensler, is quite fond of this new technology  -- he even taught the subject as a professor at MIT.

As you may know, exchanging your U.S. dollars for a foreign currency does not constitute a taxable event.  For example, you arrive at Narita airport and go to a currency window and exchange $500 U.S. for Japanese Yen.      No taxable transaction here.

But with crypto, it’s very different.  U.S. tax law, does not consider crypto to be a “currency”  --  instead, it is considered “property.”  Therefore, If you convert any cryptocurrency, into another one, or into a fiat currency (like U.S. dollars), or into any other asset, the transaction IS taxable as a short or long term capital gain or loss.  “Like-kind” exchange rules do not apply to crypto. In other words, exchanging crypto for another crypto or for anything else will trigger a tax on any appreciation.

I am a CPA who has studied bitcoin for over six years.    Take it from me, keeping historical tax records on your crypto transactions can turn into a nightmare!  The complexity comes from the fact that over time, most crypto owners will use multiple exchanges to execute their buys and sells.  This makes it very difficult to track your tax cost basis.

Fortunately, there are websites (such as WWW.COINTRACKER.COM) that provide online tracking tools at very reasonable costs.  These tools view your crypto holdings as one wallet and produce accurate cost records for every transaction.   Also, these tools make it easy for you to choose the most advantageous methods to assign costs to units sold.  Such methods include first-in-first-out, last-in-first-out, and even highest-in-first-out.

By the way, you should also know that If crypto is held for more than one-year, donations to charity are deductible at the “market value” as of the date of the gift.   Remarkably, this allows you take a charitable deduction without paying tax on paper profits.   

Regardless of how it might seem from the discussion above, taxation on crypto is not difficult, IF you employ the right tools. If you or your company wants to learn all about crypto and blockchain technology, we can help. Simply call or text me at 318-464-0899