Note: I'm not a tax professional. If you need tax advice, consult a professional.
If you pay United States taxes, chances are you are among the millions of people who got involved in buying, selling, and earning cryptocurrencies in 2017! With W2's and 1099's showing up in your mailbox, you're probably wondering whether and how to pay taxes on those incredible profits you made in 2017?
The IRS treats cryptocurrency like investment property: It taxes you on capital gains generated by the purchase price versus the sale price. The sale price is the fair market value, in US dollars, at the time of a taxable event such as:
- Trading it for fiat currency such as US dollars
- Using it to pay for goods and services
- Exchanging one cryptocurrency for another one
Aside from capital gains tax, you might also owe sales and employment taxes:
- If you used it to pay directly for goods and services you probably also owe sales taxes as well.
- If you earned cryptocurrency by working, you must pay self-employment taxes.
For more information, see:
What is not taxable:
- Buying cryptocurrency using US Dollars. (You don't have any taxable gains until you sell it.)
- Moving crypto from one wallet to another one
- Giving crypto as a gift, unless it exceeds the $14000 limit.
What might reduce your taxes:
- If you hold the cryptocurrency for more than a year, your taxes drop by half (long-term capital gains vs. short term capital gains).
No matter what, make a good faith effort to account for your crypto earnings and pay your taxes. Intentionally not paying taxes can get you into serious trouble with the IRS. If you make a good faith effort but get the amounts wrong, you may end up paying penalties or fines. Recent news about the IRS suing Coinbase for account information and winning is a clear sign that the IRS is stepping up its collections on cryptocurrency.
If you can't pay the fine, don't do the crime! :-)
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