Whether you’re a seasoned cryptocurrency investor or a novice brand new to investing in cryptocurrency, the question of how is cryptocurrency taxed can be daunting. 

One common misnomer most cryptocurrency investors believe is because cryptocurrencies are not backed by any government, thus less oversight than traditional fiat currencies, that they’re investing in an asset that won’t be taxed in the future. In reality, this couldn’t be further from the truth. Whether you’re trading NFTs or you finally sold the Bitcoin you’ve been holding onto for months, there are tax implications that come with each transaction.

How Does the IRS Treat Cryptocurrency?

Now that we have established cryptocurrency transactions are subject to taxes, we must understand how the IRS classifies these assets.

In the eyes of the IRS, cryptocurrency is classified as property and therefore is subject to tax rates paid for capital assets. Other examples of capital assets include homes, cars, stocks, or bonds.

Like all capital assets, you must calculate your tax liability at the point of disposal. If the asset is held for longer than 1 year, it is subject to the more favorable long-term capital gains tax rate. However, should you buy an asset and sell it inside of a year it will be taxed at the short-term capital gains tax rate.

Not All Transactions Are the Same

While it may seem simple and straightforward, there is another layer of detail that further determines how each transaction is taxed. The two main layers of detail include how the asset was acquired and the type of capital asset that was acquired.

How the capital asset was acquired can drastically change the tax liability associated with it. For example, cryptocurrency acquired in a manner similar to credit card rewards isn’t taxable as income until it’s sold.

The next layer to consider is the type of capital asset that you’re holding. Should you elect to buy and sell NFTs, depending on the type of NFT, it may be deemed collectible from the IRS. Therefore, if the asset being traded is a collectible, it will be subject to the collectible tax rate, which is higher than long-term capital gains tax rates.

Using Cryptocurrency to Purchase Goods or Services

The last major bucket to consider when calculating your tax liability related to cryptocurrency transactions is using them to pay for goods and services. Should you elect to pay for a good or service using cryptocurrency, you will treat that as a disposal of the cryptocurrency and any gain or loss on the transaction will be calculated at the point of sale. 

Our Recommendation

Although next tax season seems far away, it’ll be here before we know it. The sooner you engage a cryptocurrency CPA to assist in the calculation of your cryptocurrency tax liability, the sooner you’ll realize the benefits such as greater insight into your tax position prior to year-end, calculating the correct tax liability by transaction, and proper documentation for filing your taxes.

If you have additional questions about choosing a crypto CPA, don’t hesitate to reach out to our team at Founder’s CPA for guidance!

Curt Mastio
Post by Curt Mastio
November 22, 2023
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.