What Are the Taxes on Cryptocurrency Activity?

No matter if you’re scrolling through social media or reading the latest news, chances are high that you’ll see mentions of cryptocurrency in mainstream culture. Cryptocurrency is becoming increasingly popular for those who want to diversify their investment portfolio, but investors need to prepare for the tax liabilities associated with these transactions.

If you’re wondering what the taxes are on cryptocurrency, continue reading for helpful information from our experts. 

How Cryptocurrency Is Taxed 

Many cryptocurrency investors think that because cryptocurrency isn’t backed by the US government, the Internal Revenue Service (IRS) is less likely to pursue those who fail to report the income. This misconception is false as all cryptocurrency gains and losses need to be reported to the IRS.  In addition, the IRS has invested heavily in resources to help track down crypto tax cheats and continues to make it a priority.

When you purchase a capital asset of any kind, whether it is a cryptocurrency, a stock, bond, or any other type of investment, your cost to acquire the item is your basis. If you want to sell the asset, you’ll compare the original purchase price to your sale price to determine if you have a capital gain or a capital loss. 

How to Calculate Cryptocurrency Taxes

In addition to comparing your basis to your gross proceeds, you’ll need to consider the amount of time you held the asset to determine if it is a short-term or long-term capital gain.

Short-Term Capital Gains and Losses

If you buy and sell a cryptocurrency asset in a one-year period, you’ll incur a short-term capital gain if you sold it for more than the original price. If you sold it for less than the original price, it is a short-term capital loss. These short-term gains or losses are subject to tax rates that you’d pay on other forms of income and they will be taxed at your ordinary income tax rate ranging from 10-37% depending on your tax bracket.

Long-Term Capital Gains and Losses

This refers to buying an asset and selling it after a one-year period. The difference in net sales proceeds and your cost basis is either a long-term capital gain or loss. The tax rates on long-term gains are typically lower, with three tax rates for long-term capital gains— 0%, 15%, or 20% depending on your income.  The majority of taxpayers will fall in the 15% tax bracket. While it’s possible to offset your capital gains with capital losses, this offset needs to apply to the same type of asset. 

Cryptocurrency as Ordinary Income

Obtaining cryptocurrency doesn’t always happen through trading. You may receive it by mining it, as a promotion, or even free from some platforms. Staking cryptocurrency is another method to obtain it and allows you to earn interest by pledging your tokens to a validation node for the network. You’ll owe taxes based on the fair market value of the currency on the day you received it, counting it as ordinary income. Think of this as the same in substance to earning interest on a savings account balance.

Crypto Taxes Are Easy Through Founder’s CPA

We know that this topic can be confusing, but our cryptocurrency experts have the technical skill and expertise to help you accurately file your 2021 crypto taxes. Get in touch with us for a complimentary assessment to see how we can help you navigate cryptocurrency taxes. 

Curt Mastio
Post by Curt Mastio
Dec 1, 2023 2:48:28 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.