Hi, I’m Bette Hochberger, CPA, CGMA, and today I will discuss how crypto tax works and what the IRS tax rules are. If you are dealing with crypto taxes or want to learn more about it, I’m here to answer all your questions.

So, how much is crypto taxed? Is any tax-free? These are all great and pretty common questions. Crypto is viewed as property from a tax perspective. Two potential taxes could apply for individuals – Income Tax or Capital Gains Tax. In the U.S., you will pay up to 37% tax on short-term capital gains and crypto income and between 0% to 20% tax on long-term capital gains. NFTs are deemed collectibles and will typically be taxed at 28%. The tax on crypto in the U.S. depends on how much you earn, the specific transaction, and how long you’ve held the asset. And if you live here good news! Not all crypto is taxed in the USA. 

You won’t be taxed on crypto when…

  • Buying crypto with fiat currency (money that is issued and backed by a government)
  • HODLing crypto (holding onto a cryptocurrency for an extended period of time, regardless of short-term price fluctuations)
  • Moving crypto between your own wallets
  • Gifting crypto (provided you haven’t reached the lifetime gift limit, which is $15,000 per year)
  • Donating crypto to charity (though you may need a qualified appraisal if you’re donating more than $5,000)
  • Creating an NFT (non-fungible token)

If you plan to pay for something using cryptocurrency, for example, buying home renovation items at Home Depot using Bitcoin, don’t be surprised when a tax bill comes your way. Spending your crypto is subject to Capital Gains Tax as it’s a disposal of an asset. The IRS views this as you selling your crypto for market value.

While crypto does come with a lot of security, the IRS can still track it. If you’re wondering if you have to pay taxes on crypto gains or if the IRS knows about your crypto investments, keep reading. 

Here’s how the IRS knows about your crypto…

  • All major crypto exchanges must now complete KYC (Know Your Customer) checks.
  • Exchanges process banking information where they accept fiat payments in exchange for crypto.
  • Many exchanges also have records of crypto addresses you’ve withdrawn funds to – so they can identify custodial wallets too.
  • Many exchanges are sending 1099 forms to the IRS and users.
  • Subpoenas and other legal action

It’s important for taxpayers to be aware of their tax reporting obligations regarding cryptocurrency transactions. Failing to report these transactions properly can result in penalties, fines, and criminal prosecution.

I hope you learned something new today. Dealing with crypto taxes may seem stressful, and that’s where a crypto tax professional comes into play. If you’re looking for help, feel free to reach out and schedule a meeting with me. 

As always, stay safe, and I will see you next time!