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Cryptocurrency can be confusing — blockchain, crypto wallets, coins and tokens, so many types of cryptocurrency to choose from. And this doesn’t even include taxes.
So how is cryptocurrency taxed?
Because the answer can be complex — it can vary from country to country and state to state — we’ll break down today’s current cryptocurrency laws in this article so that you can know whether or not you have to pay taxes on your cryptocurrency — and if so, how much.
Cryptocurrency Laws
Around the world, and across the U.S., lawmakers are wringing their hands while they dream up ways to regulate and tax cryptocurrency.
Meanwhile, heavily funded advocates are funding lobbying efforts in an attempt to dissuade the government from overregulating cryptocurrency.
Overregulation, they claim, will force innovators to move outside the jurisdiction of U.S. regulators.
So lawmakers and regulators are having to walk a fine line between:
- over regulating and under regulating
- over-taxing and under-taxing crypto
At the time of writing, however, regulations are fairly simple.
In the U.S., the rules for reporting crypto gains are the same as they are for reporting capital gains.
As long as you hold an asset, there’s no tax on it.
However, once we sell an asset, we pay taxes on capital gains — or claim losses.
Cryptocurrency Laws Vary by State
There’s another important point to make before we move on — laws pertaining to cryptocurrency can vary from state to state.
So if you are doing more than just buying and selling crypto for personal gain, it’s important to understand these state laws.
For example, In Louisiana, under the Virtual Currency Business Act, a special license is required to operate any crypto-related business. Several other U.S. states have similar rules.
Lawmakers in a handful of U.S. states are working to incorporate favorable crypto laws. Wyoming, for example, has passed and implemented more than 20 cryptocurrency laws, including 2019's HB584 under which crypto assets are exempt from most local securities laws.
And lawmakers in Arizona are working to make Bitcoin legal tender in the state.
Next, we’ll take a brief look at federal laws that pertain to buying crypto, selling crypto, receiving crypto as a gift or inheritance, and paying taxes on crypto gains.
Cryptocurrency Laws: Buying
At this time, listing federal laws pertaining to buying cryptocurrencies is a breeze — that’s because there are none.
While residents of some U.S. states do not have access to centralized crypto exchanges, that doesn’t prevent them from buying crypto peer-to-peer or on decentralized exchanges.
Cryptocurrency Laws: Selling
As with buying crypto, laws pertaining to selling and spending cryptocurrencies are thin.
There’s no law against selling or spending cryptocurrency.
It doesn’t matter whether it’s a peer-to-peer transaction or one performed via a centralized or decentralized exchange.
However, there are some tax consequences to selling cryptocurrency.
Cryptocurrency Laws: Taxes
The IRS and cryptocurrency: how do they fit together?
For the purpose of tax reporting, cryptocurrencies work the same as any other capital asset and thus profits are subject to capital gains taxes.
If the value of the purchase is higher than the cost of the cryptocurrency, then the difference is considered a capital gain.
So, for instance, if we buy $100 worth of crypto and then ten years later we spend it on something worth $1,100, then we’re liable to pay capital gains tax on the $1,000 profit.
Tax rates on short-term capital gains — buying and selling crypto within a year — can be up to 37 percent for high income individuals.
Assets held longer than a year before being sold are taxed at a lower rate — up to 20 percent.
If crypto is sold at a loss, the seller can deduct capital losses of up to $3,000 a year.
However, if net losses exceed $3,000, they can be carried over into the next year’s reporting.
Cryptocurrency Laws: Gifts and Inheritances
What about cryptocurrency gifts?
What about cryptocurrency inheritances?
Here again, cryptocurrency is treated like any other asset. Gifts worth $15,000 or more are taxable.
Furthermore, inherited cryptocurrency may be subject to estate taxes beyond certain thresholds — $11.7 million for 2021.
Because they are subject to capital gains tax, using crypto as a currency rather than a store of value can greatly complicate tax reporting.
This is especially true for anyone who is constantly buying and spending crypto at different exchange rates throughout the year.
There are some apps that help keep track of crypto gains for tax reporting purposes. We’re not going to recommend any of those applications here. Rather, we recommend consulting a tax accountant and asking them which application they prefer their clients use.
Another important point is that the IRS now asks filers to state (under penalty of perjury) whether or not they have purchased cryptocurrencies within the tax year.
It’s still not clear whether this information is required for enforcement purposes or simply for gathering statistics.
Also, be aware that while some custodians such as Robinhood and Paypal will send out 1099 forms to their customers, not all cryptocurrency exchanges do this.
However, not receiving a 1099 doesn’t excuse a taxpayer from attesting to having bought cryptocurrency or paying taxes on cryptocurrency gains.
The Bottom Line: Cryptocurrency Laws Today
It’s important to reiterate that laws pertaining to buying, selling, spending, gifting, inheriting, and paying taxes on cryptocurrency are still changing and likely will be for years to come.
Lawmakers and financial regulators around the world are gathering information in order to come to a decision on how to set up crypto regulations and tax reporting and payment requirements.
Some seem to be making reasonable decisions.
Others, not so much.
Because cryptocurrency laws are in flux, it’s important that crypto investors and tax accountants pay close attention as these laws evolve in order to make wise decisions on how to buy, sell, spend, gift, and will their cryptocurrency to their descendants.
