Harness Wealth CPAs represent clients that invest long-term, actively trade, as well as Mine as a Business (MaaB). We’re here to help guide you through the taxes of one of the most exciting and increasingly popular technology and investment opportunities.
Cryptocurrency Taxes in the United States
One of the most common misconceptions about cryptocurrencies is that, because they are not issued by a central government, there is no need to pay taxes on profits from trading or mining them. While this is indeed the case in some countries around the world, users in the United States are not so lucky.
In the United States all profits made from the purchases and sales of digital currencies such as Bitcoin and Ethereum are subject to capital gains taxes. This is because they are treated as property (much like stocks, real estate, or gold). However, it’s important to keep in mind that all the rules that apply to these other assets do not also all apply to cryptocurrencies.
The laws around how crypto taxes work are fairly new and will continue to evolve alongside this groundbreaking technology. This makes it all the more important to consult an expert if you’ve experienced profits (or losses) via any cryptocurrency related activities this year, and to plan ahead for future years as well if cryptocurrency makes up a sizable chunk of your assets.
IRS Cryptocurrency Laws: Keeping Records, Taxable Events, and Capital Gains and Losses
While every individual’s experience is different and subject to the tax laws of their specific jurisdiction, the high-level cryptocurrency tax rules you should be aware of are that:
- Trading from a cryptocurrency to fiat currency like USD is a taxable event
- Trading from one cryptocurrency to another cryptocurrency (i.e. from Bitcoin to Ethereum) is also a taxable event
- Spending cryptocurrency on goods or services is a taxable event
- A transfer of the same cryptocurrency from a wallet address to another wallet address is not considered a taxable event, but you should still maintain a record of the transaction
- Selling coins that were mined is considered a taxable event
- Selling coins that were airdropped via a fork (i.e. Bitcoin Cash received from the Bitcoin fork) is considered a taxable event
- Trying to hide cryptocurrency assets or profits is considered tax evasion
- Capital gains losses can sometimes be claimed on cryptocurrencies sold at a loss
- Businesses based on mining or using crypto have unique guidelines
- Holding cryptocurrency without selling is not considered a taxable event
These bullet points are a brief summary, but there are other detailed rules and regulations around crypto taxes that any serious trader or miner should be aware of.
If you took part in anything other than simply buying crypto to hold in a wallet, you should highly consider discussing your potential tax liabilities with a professional. While the laws will continue to develop, one thing is clear: the IRS expects you to make a good faith effort in reporting cryptocurrency activities.
Cryptocurrency Alongside Your Other Assets: Help from CPAs and Financial Advisors
Harness Wealth works with tech founders, employees, and VCs — these folks were typically very early adopters of cryptocurrency given their industry, and we’ve seen crypto make up increasingly sizable portions of investment portfolios. As this happens, there are not only tax questions but overall investment management questions that arise, particularly around risk.
The technology is exciting, but many people are failing to grasp the reporting requirements as vendors play catch-up in providing users with the documentation they need (and is legally required!).
A clear understanding of your personal tax responsibilities is vital to participating in this growing economy. Sign up with Harness Wealth today to find both tax and financial advisors that will ensure that your crypto and overall assets are protected.