How is Crypto Taxed?

Litchfield, NH Resident Has Questions

It is important to keep in mind that profits from cryptocurrencies, including bitcoin and other digital coins, are taxed by the IRS.  Just like a stock investment, cryptocurrency profits are subject to capital gains.  This may be short-term capital gains if the crypto was owned for less than one year or long-term capital gains for investments exceeding one year.  Similarly, any losses can offset other gains and lower the total amount that you pay in taxes.

A Litchfield resident was considering investing in cryptocurrency.  Concerned about the tax implications, he first contacted the experts at Merrimack Tax Associates.

Crypto Holders May Not Necessarily Owe Taxes for the Year

Purchasing and holding onto cryptocurrency is not a taxable action, regardless of whether it increases in value.  Transferring cryptocurrency is also not taxable.  You will be taxed if, and when, you sell the cryptocurrency.  When you sell the crypto, depending on how long you have owned it, you will be taxed either as short-term or long-term capital gains.

When filing your taxes, there is a question on Form 1040 about whether you sold any of this virtual currency in the calendar year.  This will only be checked if the cryptocurrency was sold, not if it was only bought and is still in your possession.  You will use this same form to declare any crypto income.

Trading cryptocurrency differs from stocks and bonds in that you will not receive a 1099 tax form at the end of the year to report any gains or losses.  This makes it necessary for the taxpayer to keep accurate transaction details, including income or losses, of cryptocurrency trades throughout the year. 

The Litchfield resident now has a better understanding of how he will be taxed for income earned through cryptocurrency.  He plans to venture into these investments, but also now realizes the importance of keeping accurate records for future tax filings.