The ins and outs of taxes are relatively straightforward, but what about tax implications regarding cryptocurrencies? The rise of cryptocurrencies such as Bitcoin and Ethereum have resulted in questions surrounding tax implications. The Internal Revenue Service (IRS) continues to put more energy, time, and resources into enforcing laws surrounding cryptocurrency taxes.

If you’ve been wondering how cryptocurrency affects your taxes, then you are in the right place. Here is additional information that our cryptocurrency experts want you to know.

Are Cryptocurrencies Taxable?

Yes, depending on the transaction type, cryptocurrencies are indeed taxable. Taxpayers who use a regulated centralized exchange, such as Coinbase, are under watch by the IRS to ensure that the taxpayer is complying with all tax rules.

It’s important to note that the tax implications surrounding cryptocurrency are dependent on how the cryptocurrency was acquired. An example of a non-taxable acquisition, is in the form of a credit credit reward. For example, if you receive credit rewards in the form of cryptocurrency, this reward is not considered taxable income but rather a rebate. An example of a taxable acquisition, is in the form of loan interest. For example, if you loan out some of your cryptocurrency and receive interest on the loan, that interest in the form of cryptocurrencies is a taxable acquisition.  

For tax purposes, the IRS deems cryptocurrency as property. Because of this, certain cryptocurrency transactions are considered to be a taxable disposal of the asset which triggers either a short or long term capital gain or loss.

Tax Differences Between Cryptocurrencies and Traditional Securities

Another factor to consider is how cryptocurrency taxes are calculated as there are differences compared with traditional investments that you might have in your portfolio. While stocks and bonds are subject to wash sale rules, this is not the case for cryptocurrency. This is due to its classification as property by the IRS.  

Tax-loss harvesting is another consideration. In order to qualify, you’ll need a taxable investment account. This means if you currently have crypto in a self-directed IRA, you won’t be able to take advantage of tax harvesting. A realized loss is also necessary to qualify for tax harvesting. If you earned a significant amount from one cryptocurrency, you can offset your gains with losses incurred from another cryptocurrency. 

What Happens If You Don’t Report Cryptocurrency on Your Taxes?

In the case that you don’t accurately report cryptocurrency on your taxes or if you fail to do so altogether, you will face IRS penalties and interests that can add up to be quite significant. 

Thankfully, there are other strategies to reduce your tax liability legally and cut down on the amount that you owe for taxes. Some tactics include taking profits in a low-income year, buy and sell via your IRA or 401-K, give a cryptocurrency donation, or out a cryptocurrency loan.

Final Thoughts

Hopefully this information was helpful in regard to your cryptocurrency taxes issues. For additional information on this topic or to learn more about how our cryptocurrency tax experts can help, get in touch with our team at Founders CPA today!

Curt Mastio
Post by Curt Mastio
Nov 22, 2023 4:13:00 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.