As taxpayers around the world prepare to pay their returns, it’s never a bad idea to explore the topic of taxes. But how do crypto taxes work and what are some key points to know going into this year’s tax season? It’s important that you’re aware of the guidelines implemented by the IRS when it comes to reporting your taxable cryptocurrency purchases, transactions, sales, and trades.

Unique Elements of Cryptocurrency

Speaking generally, if you purchase cryptocurrency, it is not considered to be a taxable event. If you bought cryptocurrency but you didn’t spend or trade them, you won’t owe any taxes on them. Let’s say you purchase Bitcoin and you continue to hold it in your digital wallet without trading, exchanging, or selling it, you won’t owe taxes on it. 

Here are the taxable situations that the IRS has outlined:

  • Trading one type of cryptocurrency for another
  • Selling your cryptocurrency for cash
  • Receiving payment in the form of cryptocurrency
  • Staking or mining cryptocurrency
  • Using cryptocurrency as a payment with a merchant including a cryptocurrency-based debit card

Capital Gains Taxes

Another topic regarding how do crypto taxes work is capital gains. The IRS treats cryptocurrencies as property which means if you spend it or trade it, this is considered taxable. Determining the capital loss or gain depends on the difference in price between when you acquired the asset, the sale proceeds, and the overall holding period. As you can imagine, it’s important to keep tabs on your transactions so your taxes are filed accurately and properly, something with which an expert can help. Cryptocurrency software is also a helpful asset in this situation. 

Wash Sale Rules

Another important consideration to keep in mind is the wash sale rule. After all, the price of cryptocurrency is constantly changing. This rule states that if you have an investment that’s lost money and you end up selling it, you aren’t able to buy it back within 30 days before or after the sale. Cryptocurrency is advantageous to other assets in regard to the wash sale rules as assets classified as property by the IRS are not subject to wash sale rules.

Don’t Forget About NFTs

If you’ve also been involved in non-fungible tokens, you’ll want to keep other rules in mind. For example, anyone who trades, sells, or buys NFTs needs to keep careful records and pinpoint the equivalent dollar amount of the underlying currency when the transaction happens.

Let’s say you purchased Ethereum at the beginning of the year and used it to purchase an NFT a few months later. During this time, the currency increased in value. You’ll need to keep track of the dollar equivalent at the time of each transaction. 

Feeling Stressed About Your Cryptocurrency Transactions?

We know it can be overwhelming to navigate the ins and outs of cryptocurrency taxes. If you’re still wondering how do crypto taxes work and you aren’t sure where to begin, our experts are here to help. We are happy to work with you to ensure that your tax filings are timely and accurate. Contact us at Founder’s CPA for a free consultation!

Curt Mastio
Post by Curt Mastio
Nov 22, 2023 2:38:52 PM
Curt Mastio started Founder’s CPA in 2017 and currently serves as the Managing Partner of the firm. After obtaining both his Bachelor’s and Master’s degrees in accounting from the University of Illinois in Urbana-Champaign Curt started his career in Big Four public accounting. Shortly thereafter Curt served as the Chief Financial Officer of Storage Squad began his stint as an Adjunct Instructor at Northwestern University’s Farley Center for Entrepreneurship and has been teaching Accounting & Finance to undergraduate students for 6+ years. In his current role Curt oversees strategy, operations, and business development at Founder’s CPA. Further, Curt has experience working directly with 200+ startups and small businesses providing accounting, tax, and outsourced CFO services. His industry expertise lies in the SaaS, Blockchain, Marketplace, and Fintech industries. He has served as a key advisor working directly with startups that range from pre-revenue to companies generating over $30 million dollars a year in revenue. Lastly, he serves a key role working directly with the firm’s clients that have collectively raised over $200 million in venture capital funding to date. Curt is also an active advisor, mentor, and investor in the startup ecosystem. He has facilitated numerous workshops, webinars, and presentations to incubators and other startup-centric organizations. He is also an active mentor for Techstars in both Chicago and Iowa. Outside of his daily professional duties Curt is actively involved with Beat the Streets Chicago and was a founding member of its Young Professionals Board. His efforts in both leadership and community involvement were recognized when he was awarded the Illinois CPA Society’s Outstanding Young Professional Leadership Award in 2020. He was also a panelist at their annual conference in 2022 where he spoke about his experiences starting and operating a public accounting firm. He maintains an active Certified Public Accountant designation that he obtained in 2014. Outside of work, Curt can be found spending time with his friends & family including his dog Rufus. His hobbies include golf, boating, cooking, reading, and attending sporting events & concerts.