The Taxation of Cryptocurrency
“Everything you don’t understand about money combined with everything you don’t understand about computers.”
– John Oliver
According to a Pew Research Center survey, 16% of Americans have had a personal interaction with cryptocurrency in the form of investing or its use as tender in the purchase or sale of goods. While this may sound like a small fraction of the population it is weighted heavily towards younger taxpayers – taxpayers who seem to easily embrace a digital currency not backed by any nation. This might help explain why the Government and politicians have been slow to create and implement tax laws and guidance when dealing in the digital space. This generational gap is slow to close, but some guidance has been issued.
From the little guidance we have there are a few key points to take home:
- The IRS treats all cryptocurrency as property and not as a currency. This means every transaction where crypto is exchanged for goods and services or for other forms of cryptocurrency creates a taxable event. The cryptocurrency must be brought up to fair market value at the time of the transaction and a gain or loss recorded.
- When a gain or loss is recorded on a crypto exchange the IRS has stated that unless the taxpayer has identified specific units of currency all units must be treated as acquired and sold in the order they were acquired.
- Cryptocurrencies are subject to Estate and Gift tax the same as any other property held by a taxpayer.
- The burden of record keeping is on the taxpayer, not the broker or digital exchange the crypto is traded through. This means the taxpayer is responsible for all information reported regarding basis and term each unit of crypto was held for.
It’s important to condense these points into one key takeaway regarding cryptocurrency. As of now the United States government does not consider cryptocurrency to be a currency and it will not for the foreseeable future. Keep in mind an understanding that each transaction will have the same tax effect as selling or trading a stock with your brokerage account.
There is a silver lining to this treatment, however. Since crypto is an asset you can decrease your gains by any costs associated with acquiring or selling your interest. You can even use your losses to offset gains recognized in your portfolio on other stock sales.
If you need help understanding your unique tax situation that might not be covered by the above, please consider reaching out to a member of the Kimble team.