Taxes and Crypto, What Your Need to Know

Just like traditional currency, crypto currencies are taxed by the government and with the IRS focusing more on crypto tax compliance, it’s even more important for investors to become familiar with how crypto currencies are taxed in 2022. In addition to tax prep and regulations, there are specific forms that are needed to report cryptocurrency to the IRS, here’s what you need to know:

How Are Crypto Currencies Taxed by the IRS?

Crypto currencies are considered property for tax purposes. Crypto currency is defined as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value” by the IRS. Examples of crypto currency include bitcoin, litecoin, and XRP. 

Crypto currencies are taxed like other forms of property like stocks, bonds, and real-estate. You incur capital gains and losses on your investments when you sell, trade, or dispose of your crypto assets. 

Cryptocurrency and Taxes

Tax liability or tax consequences apply for the sale or exchange of cryptocurrencies, or when used to pay for goods or services, or holding as an investment. Depending on your tax bracket, you will need to pay a tax percentage on any gain. The tax percentage will depend on your personal tax bracket and the term length, whether short-term or long-term. 

If you earn crypto currencies, you are liable to pay income tax. This is based on the U.S. dollar amount that is equivalent to your cryptocurrency. 

When Are Taxes Required for Cryptocurrency?

When utilizing cryptocurrency, you will need to create a tax reporting requirement whenever you incur a taxable event. Taxable events include:

• Trading currency to fiat currency (like the U.S. dollar)
• Trading a cryptocurrency for another cryptocurrency
• Spending cryptocurrency for goods and services
• Earning cryptocurrency as income

Taxable events do not include:

• Buying and holding cryptocurrencies
• Transferring cryptocurrencies between wallets that you own

Is Calculating Taxes for Cryptocurrencies Hard?

Cryptocurrency can be difficult to calculate tax for due to the increasing popularity surrounding it and the modifications to taxable instances. There are three main ways to calculate taxes for your cryptocurrency:

1. First-in First-out Method (FIFO)
2. Last-in First-out Method (LIFO)
3. Highest-in First-out Method (HIFO)

FIFO is the default method for calculating your taxes for your crypto currencies. Other methods such as the LIFO and HIFO methods can be used in certain situations as defined by the IRS here. To ensure you are calculating your crypto currency taxes correctly and what your next steps are, speak with an accountant in your area from ModVentures LLC or connect for complete tax services.