Many tax preparers throughout the United States are choosing not to work with clients that use bitcoin and other cryptocurrencies. The problem with making this choice for your practice is that these digital currencies are becoming more and more prevalent, without any sign of going away. TxSEA urges all members to stay up-to-date with virtual currencies and learn how to work with and accept clients that work with these forms of currency.
Transactions that result in a tax are called taxable events. Those that don’t are called non-taxable events. Let’s break them down:
Buying crypto with cash and holding it: Just buying and owning crypto isn’t taxable on its own. The tax is often incurred later on when you sell, and its gains are “realized.”
Donating crypto to a qualified tax-exempt charity or non-profit: If you give crypto directly to a 501(c)(3) charitable organization, like GiveCrypto.org, you may be able to claim a charitable deduction.
Receiving a gift: If you’re lucky enough to get crypto as a gift, you’re not likely to incur a tax until you sell or participate in another taxable activity like staking.
Giving a gift: How thoughtful! You can gift up to $15,000 per recipient per year without paying taxes (and higher amounts to spouses). If your gift exceeds $15,000 per recipient, you’ll need to file a gift tax return (which generally does not result in any current tax liability). If you transfer crypto to someone else outside of a purchase for goods or services, it may count as a gift, even if you didn’t mean it that way.
Transferring crypto to yourself: Transferring crypto between wallets or accounts you own isn’t taxable. You can transfer over your original cost basis and date acquired to continue tracking your potential tax impact for when you eventually sell.
Taxable as capital gains
Selling crypto for cash: Did you sell your crypto for U.S. dollars? You’ll owe taxes if you sell your assets for more than you paid for them. If you sell at a loss, you may be able to deduct that loss on your taxes.
Converting one crypto to another: When you use bitcoin to buy ether, for example, you technically have to sell your bitcoin before you buy a new asset. Because this is a sale, the IRS considers it taxable. You’ll owe taxes if you sold your bitcoin for more than you paid for it.
Spending crypto on goods and services: If you use bitcoin to buy a pizza, for example, you’ll likely owe taxes on the transaction. To the IRS, spending crypto isn’t that much different from selling it. You need to sell the asset before it can be exchanged for a good or service, and selling crypto makes it subject to capital gains taxes.
Taxable as income
Getting paid in crypto: NFL offensive tackle Russell Okung was one of a few big names to take their paychecks in bitcoin in 2021 — and he’s likely paying income tax on it. If you followed Okung’s lead and were paid in crypto by an employer, your crypto will be taxed as compensation according to your income tax bracket.
Getting crypto in exchange for goods or services: If you accept crypto in payment for a good or service, you’re responsible for reporting it as income to the IRS.
Mining crypto: If you mined crypto, you’ll likely owe taxes on your earnings based on the fair market value (often the price) of the mined coins at the time they were received. Crypto mined as a business is taxed as self-employment income.
Earning staking rewards: Staking rewards are treated like mining proceeds: taxes are based on the fair market value of your rewards on the day you received them.
Earning other income: You might earn a return by holding certain cryptocurrencies. This is considered taxable income. Although this is sometimes referred to as interest, the IRS treats it differently than interest you’d earn from a bank.
Getting crypto from a hard fork: Taxes on crypto you got from a hard fork depend on how you use the asset, when it’s available to withdraw from your exchange, and more. See the latest IRS guidance on hard forks
Getting an airdrop: You might receive airdrops from a crypto company as part of a marketing campaign or giveaway. Getting an airdrop is taxable as income, and you’ll need to report the amount in your taxes. See the latest IRS guidance on airdrops
Receiving other incentives or rewards: This list isn’t comprehensive — there are a variety of reasons why you might receive free crypto. These can include rewards from Coinbase Earn or incentives like getting $5 in bitcoin for referring a friend to a crypto exchange. Regardless, you’ll need to report these as income.
Cryptocurrency is finding its way into our daily lives and in homes all across America. Guest speaker, Tynisa (Ty) Gaines EA, B.S., M.P.A., has 20 years’ tax experience and currently oversees the operations for Token Tax, a cryptocurrency start-up firm. Join us at our June 2022 Tax Convention to learn more about how to address cryptocurrency in your practice.
Why Join TxSEA?
TxSEA makes it easy for enrolled agents in Texas to stay on top of the credits they need to maintain their licensing, as well as provides an opportunity for networking with other EAs in their local area. This can provide helpful information and lead to tax professionals working as enrolled agents today.