The short answer is yes. The IRS has made specific comments on the topic of cryptocurrency taxation, with the most important being that they are treated as property for tax purposes.
For the everyday crypto investor, be that on a small or large scale, you’ll need to have a clear understanding of the amount of tax that you’re liable to pay, and when you need to pay it. One of the most important things to do during the process of holding cryptocurrency is to ensure you keep track of any transactions that you make. In particular, for each transaction you’ll want the following information:
- The date that you acquired the cryptocurrency.
- The value of the cryptocurrency in US Dollars at the time of acquisition.
- The date that you disposed of (e.g. sold) the cryptocurrency.
- The value of the cryptocurrency in US Dollars at the time of disposal.
Using the above data points, you should have everything you need to understand your basic capital gains or losses. Before I go into that, let’s take a quick look at each data point in the form of an example:
On October 11th, 2016 I purchase 100 Bitcoin at a total cost of $63,000 (at a rate of $630 per Bitcoin). One year and 10 days later, on October 21st 2017, I sell all 100 Bitcoin at a total value of $600,000 (at a rate of $6,000 per Bitcoin), making a total capital gain of $537,000 (selling value – purchase value).
In the above example, the $537,000 capital gain that I made would be subject to federal capital gains tax. As I held the cryptocurrency for over 1 year in total, I’d qualify for the long-term capital gains rate, which is a lower tax rate. For my 2017 tax return I’d owe 20% of my capital gain in federal tax, which would total $107,400. If I’d had held the cryptocurrency for less than 1 year, I’d have to pay a rate of 39.6%, which would equal $212,652. Sometimes it pays to wait. Alongside this, I’d have to pay my capital gains state tax, which varies depending on where you reside.
Obviously, using the same logic, if you were to make a loss on your cryptocurrency investment then you’d be able to offset this against your tax bill.
Being Paid in Cryptocurrency
Alongside capital gains or losses there may be occasions where you’ll also have to pay income tax. One of these situations would be is if you’re hired as a contractor to deliver services and are compensated in cryptocurrency. In order to calculate the amount that you owe, you’ll want to track the price of the cryptocurrency that you received at the time you received it. From there you can then calculate the amount due in the exact same way that you would if you had been paid in US dollars.
Now, this doesn’t include any compensation in cryptocurrency from a company that you’re actually employed. In this case, your employer will handle the payment of income tax.
You’ll also still be liable to pay tax on any capital gains that you make during the period of acquiring the cryptocurrency and then trading them for US dollars.
Keeping Track of Transactions
An integral part of being able to calculate how much tax you’re due to pay is actually recording all of the transactions that you’ve made within the various exchanges, as well as any private trades.
If you’re particularly organized, tracking all this information within a spreadsheet will usually suffice, but there are also some online tools that make this process even easier. One in particular is CoinTracking (note: I have no affiliation with CoinTracking). CoinTracking actually integrates with a ton of different exchanges and will pull in your transaction history and automatically calculate your tax responsibilities for you. There are a few other solutions that you can check out within our list of portfolio tracking tools.
A Final Note
Whenever you’re making sizeable investments, it’s worth consulting with a trained accountant that can determine the best way to manage your tax responsibilities, as well as update you with any legislation changes that may affect you.
Disclaimer: While all of the contents of this article have been heavily researched and verified, I am not a trained lawyer or accountant, therefore you should not take this as direct legal advice. Please consult your accountant and/or lawyer before filing your cryptocurrency-related taxes to ensure that you are operating within your own state and/or country's laws.