Cryptocurrency is taxed by the IRS

Cryptocurrency, a kind of virtual currency that is recorded on a digital ledger called a blockchain, is still a fairly new technology that’s subject to ever-changing tax laws. 

As a result, newcomers to cryptocurrency each year enter tax season wondering what taxes they will owe on crypto they bought, sold, or were paid with. That often leaves those people going to social media to ask for advice from experienced cryptocurrency investors.

Do you have to pay taxes on cryptocurrency?

Yes, you do have to pay taxes on cryptocurrency if you sell it, exchange it for something else, mine it or receive it as payment.

You don’t have to pay taxes when you purchase cryptocurrency with real money, but you should still record the details of the sale in your tax records because you’ll need to know its purchase value when you sell or exchange it later.

The Internal Revenue Service (IRS) describes cryptocurrency as a kind of virtual currency that is recorded on a digital ledger called a blockchain. Many people buy cryptocurrency as an investment because its value changes over time, while others use it in place of real currency. But for tax purposes, the IRS treats cryptocurrency as property, rather than as currency. 

H&R Block says you are taxed if you sell cryptocurrency, create it, get paid with it or exchange it for a good, service or property. 

Cryptocurrency is subject to capital gains and losses, according to TurboTax. It’s considered a long-term capital gain if you held on to the currency for at least a year before selling it, and considered a short-term capital gain if you held onto it for less than a year. H&R Block explains that the tax amount is based on the difference in value of the cryptocurrency between when you bought it and when you sold or exchanged it.

For example, if you bought 10 coins of a cryptocurrency for $500, and then sold those same 10 coins for $5,000 two years later, then you’d pay a long-term capital gains tax on that additional $4,500 of profit. 

Capital gains taxes also apply when you spend cryptocurrency on purchases. As another example, if you bought 10 coins of a cryptocurrency for $50 each, and then a year later those coins were worth $60 each and you spent two of them on a chair, you’d have to pay capital gains taxes on the $20 increase in combined value of those two coins.

Cryptocurrency is taxed as income if you receive it as payment or if you mine it — that’s the process in which cryptocurrency is added to the blockchain. You report your cryptocurrency income at the fair market value of the cryptocurrency on the day you received or mined it, TurboTax says.

The IRS says you do not have to pay taxes for purchases of cryptocurrency with real, physical currency. The IRS also says you don’t have to pay taxes on cryptocurrency that’s a gift until you sell, exchange or otherwise dispose of it.

According to TurboTax, the IRS is increasing its enforcement of cryptocurrency tax reporting. 

“The IRS is paying very close attention to crypto related activity because they believe it’s an area of significant underreporting by taxpayers,” said Amy Miller, senior manager at the American Institute of Certified Public Accountants (AICPA) Tax Policy & Advocacy Team and a specialist in cryptocurrency.

H&R Block recommends you record the purchase price of any cryptocurrency you buy to be prepared for the IRS’s scrutiny when you later sell it or exchange it. 

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