Cryptocurrencies have exploded in popularity over the past couple of years. That said, most cryptocurrency users are unaware of the technical nature in which cryptocurrencies are classified and subsequently taxed. Even more complicated is cryptocurrency accounting which needs to be factored in before taxes each year. 

If you’ve always wanted to learn more about cryptocurrency but didn’t know where to start, use the below as a jumping-off point. Our experts are always here to help!

What Is Cryptocurrency?

Cryptocurrencies are tokens that operate as a digital medium of exchange. They allow users to process transactions that are verified and maintained by a decentralized system, a blockchain. Unlike fiat currencies, the IRS treats cryptocurrencies as property, and therefore they’re subject to different tax laws than currency.

Use Cases for Cryptocurrency

Before we get into how to account for cryptocurrencies, it is important to understand the different types of projects that exist in the cryptocurrency ecosystem. Cryptocurrencies are unique in that the type of transaction that is processed may drastically change the taxability of the transactions. For example, cryptocurrencies can be staked to secure the network. The user is then paid a reward, receiving income, for staking their tokens on the network. Cryptocurrencies can also be lent out to other users, who then pay the lender back with interest.

Though the two transactions above seem similar in nature, the tokens are loaned or staked and in return the user receives income. However, the IRS treats these transactions differently.

Tax Rates Change Based on How You Interact with Cryptocurrency

As we noted above, on paper cryptocurrency accounting may seem straightforward. That said, there are a lot of complexities beneath the surface. 

It is critically important for cryptocurrency users to understand the intricacies of how income is earned with their crypto. For example, interest income earned for loaning your cryptocurrency out to other users is taxable income when received because the user is not creating any new property through securing the network.

This is just one example of the complicated nature of cryptocurrency accounting. Depending on the types of transactions you’re processing, your cryptocurrency may end up subject to a myriad of tax rates such as long-term capital gains, short-term capital gains, ordinary income, and collectibles.

Options for Calculating your Cryptocurrency Taxes

Accounting for your cryptocurrency taxes can be a cumbersome process. While it is always an option to manually compile, calculate, and file your cryptocurrency taxes it is often more efficient to use cryptocurrency taxes software or engage a crypto CPA. Software, or a crypto CPA, strongly reduces the potential for human error when dealing with complex cryptocurrency accounting.

If you have additional questions about choosing the 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.