How much do I have to make from crypto to report it on my taxes?
There is generally no minimum threshold for reporting crypto sales or exchanges on your taxes. If you sold or exchanged crypto you should include those transactions on your tax return.
When crypto was first introduced, there was significant uncertainty about how it would be taxed and when transactions needed to be reported. But now, the IRS has since provided significant guidance on how to treat crypto transactions in various circumstances.
A key aspect to remember is that crypto is not treated as a currency for tax purposes. Instead, it is taxed like property. What's more, sometimes crypto is taxed as a long-term or short-term capital gain. However, there are situations when crypto is taxed as ordinary income, such as receiving crypto as compensation. Although IRS guidance has provided some certainty on these scenarios, this remains a complicated area of tax law. If you are unsure about the tax implications of receiving or selling crypto, you may want to ask a lawyer or tax professional.
Many crypto exchanges have also introduced reporting that makes crypto taxes less burdensome. Many crypto exchanges allow you to pull tax reports that list all your transactions and the capital gains and losses resulting from each transaction. These reports make it easier to include your crypto transactions on your tax return. If you acquire or dispose of crypto outside of an exchange, it is important for you to create your own accurate records for each transaction.
Do I have to report crypto on taxes if I do not sell?
Typically, crypto must be reported on your tax return if you sell or exchange crypto during the tax year or receive crypto as compensation for work that you performed. So, although you might not have sold your crypto during the tax year, you may still be required to report crypto transactions on your tax return. Even if you did not have any taxable crypto transactions during the tax year, the IRS does require you to answer a question on the individual tax return about whether you received, sold, exchanged or otherwise disposed of any financial interest in any virtual currency during the tax year.
An exchange of crypto that results in a taxable event occurs anytime that you exchange crypto for anything else. A common example would be exchanging one type of crypto for another type of crypto. For example, if you exchange one BTC for fifteen ETH, that transaction should be reported on your tax return. Exchanging crypto for an item or service also results in a reportable transaction. For example, if you trade crypto for a meal at a restaurant, you would need to include that transaction on your tax return.
Taxes on crypto can get complex when you have hundreds or thousands of transactions during the tax year. Many people do not realize that exchanging crypto for goods or services is a taxable transaction. You can save yourself significant headaches by tracking your crypto transactions throughout the year. Our tax professionals are available to assist you if you need help with reporting crypto transactions on your tax return.
If I was paid for work in crypto, how do I pay tax on that income?
If you are a W-2 employee, any income that you receive in the form of crypto will be taxed the same as if you were receiving a regular paycheck. You will still be responsible for paying Social Security and Medicare tax on the income and your compensation will be subject to regular income tax. Although your employer may offer to pay you crypto instead of U.S. dollars, your employer likely cannot require you to accept crypto if you prefer to be paid in U.S. dollars.
Crypto that you receive for services that you perform as an independent contractor or self-employed individual will be treated as self-employment income. The IRS has stated that you will be taxed on the fair market value in US dollars on the crypto that you receive for the services that you provide. The crypto will be subject to self-employment tax and ordinary income tax, which is no different than receiving cash. If you have more questions regarding the tax implications of accepting crypto as payment for goods or services, reach out to a lawyer or tax professional for specific advice.
How long should I keep crypto?
Determining how long to hold onto crypto depends on your risk tolerance and your overall financial goals. From a tax perspective, it might make sense to hold onto crypto for longer than one year so that you pay taxes at the preferential long-term capital gains rate, instead of the higher short-term capital gains rate. Crypto values are volatile though, so there is no guarantee that your crypto will be worth the same amount in the future as it is today.
If you need assistance in determining whether it is the right time to sell your crypto, it is recommended that you consult with a financial advisor or CPA. Because of the volatility of crypto, most professionals recommend that you not invest more in crypto than you can afford to lose. Putting money into crypto can be risky and it is possible that you may lose your entire investment.
Is trading crypto similar to trading stock?
Crypto exchanges have made trading crypto as easy as trading stocks. However, crypto and stocks are two very different types of investments.
There are typically two ways that you can earn money from investing in stocks. You could sell the stock to another investor for an amount greater than you paid. Additionally, some companies will pay dividends to their stockholders, which can be paid on a regular basis. With crypto, you can generally only make money by selling your crypto to another investor. Because your ownership in crypto does not usually represent ownership in an actual company, you do not own a share in a company that can earn a profit and distribute a portion of that profit to you in the form of a dividend.
Regulations on stocks and crypto also differ significantly. Stocks are heavily regulated and are traded on heavily regulated exchanges, such as the New York Stock Exchange and the NASDAQ. Although crypto is increasingly becoming the subject of new regulations, the current lack of regulations can make crypto less safe and more susceptible to scams.
For more information about the ever-changing regulatory and tax climate around crypto, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.