Yes, you do. According to the Internal Revenue Service (IRS), cryptocurrency is classified as a type of property. This means that crypto transactions are taxable by law, just like any transaction involving other forms of property (stocks, bonds, etc.).
The rule applies to individuals and businesses alike.
Reporting Crypto Payments Is Just Like Income
You’re adding cryptocurrency transactions just as you’d add dollars for gross income. Except cryptocurrency is a thicket of variables.
Reporting involves 1) the date of the transaction, 2) the cryptocurrency transacted, and 3) the value (on the date of the transaction) of the cryptocurrency in U.S. dollars. We’re looking at high-volume, complex accounting right out of the gate.
There’s a “Profitability Threshold” for Crypto Payments
Let’s say your business engaged in 100 or more transactions. In each transaction, a “virtual currency” was exchanged for goods or services. In a B2C situation, you’re already past the profitability threshold.
This is not the time to internalize crypto accounting. You’ll spend more on staff and training than what you gained from opening a new payment method for your customers.
Which Types of Crypto Activity are Taxable?
Not all cryptocurrency activity is taxable, but most are. Let’s break down which specific transactions you need to report on your tax return and which types of transactions aren’t taxable.
Crypto activity only counts as a taxable event if the value of your crypto has increased. Let’s say you bought $1,000 in crypto and sold it for $2,000. In this case, you would have to report and pay taxes on your profit of $1,000.
Capital Gains & Losses are Taxable
You have to pay taxes when you recognize a capital gain by selling, trading, or disposing of cryptocurrency. Likewise, any crypto activity that resulted in a capital loss must be reported as well.
The IRS makes this very clear by placing a question at the top of Form 1040 that asks, “[a]t any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
By including this question on Form 1040, the IRS is sending a clear message: ignorance is no excuse for the omission of crypto activity on your tax return.
Other Taxable Crypto Events
Here are some other common crypto activities that tend to result in capital gains and count as taxable events:
- Trading one form of cryptocurrency for another digital currency
- Receiving cryptocurrency in the form of a payment
- Staking or mining cryptocurrency
- Receiving airdropped tokens as the result of a hard fork
If you used crypto to purchase goods or services, you will also owe taxes if the realized value is greater than the original price you paid for the crypto. For example, let’s say you bought one Bitcoin for $20,000, and the value has since increased to $45,000. If you used that crypto to buy a $45,000 car, you’d have to report $25,000 in capital gains.
Which Types of Crypto Activity are Non-Taxable?
The act of buying or holding crypto does not count as a taxable event, even if the value increases. Here are a few other crypto activities that do not need to be included on your IRS 8949:
- Transferring like-for-like assets between exchanges
- Gifting cryptocurrency
- Donating cryptocurrency (this is actually tax deductible)
Even Non-Taxable Crypto Activity Should Be Reported
Even though these activities are not taxable, you should still report the two latter examples on your tax return because you may be eligible for the itemized charitable deduction.
How to Simplify Crypto Tax Reporting and Minimize Crypto Taxes
Get in touch with a qualified CPA as soon as possible.
We’d love to schedule a free consultation with you, and we’re happy to speak with any business owner about any crypto question at any time. Making crypto profitable for small and medium-sized firms is one of our missions, and we’re good at it.