Are you an investor who’s relatively new to the cryptocurrency landscape? Among the other things you’re quickly finding out about digital currencies, you might be surprised to learn that cryptocurrency is taxable. The IRS classifies cryptocurrency as property, not unlike other investment vehicles like stocks or precious metals.
If you’ve been buying and selling cryptocurrencies over the past year, it’s vital to understand how crypto holdings have the potential to affect your 2022 taxes. You don’t want to face financial or legal consequences related to improper reporting or incorrect handling of your crypto-related tax obligations. If you’re new to cryptocurrency investing, here’s what you need to know.
When Are Cryptocurrencies Taxed?
Cryptocurrencies can be taxed in a variety of different ways, and exactly how taxes are levied depends on the activities that are taking place with the crypto in question. Some actions or situations will require you to pay taxes, and others won’t. Below, you’ll find an overview of the ways crypto is taxed in various circumstances.
Purchases With Dollars
Buying cryptocurrency with a fiat currency — like the U.S. dollar — doesn’t trigger any taxes. Similarly, if you keep the purchase in the exchange or shift it to a digital wallet, that won’t lead to any taxes. As a result, you won’t need to report any of that crypto-related purchasing activity to the IRS.
Crypto Payments
If you receive cryptocurrency in payment for goods or services — including as payment for a job — that’s taxable. It’s considered income, so the typical rules apply.
Holdings
Like making purchases, holding cryptocurrency isn’t taxable on its own. If you purchase a digital asset and keep it long-term — not trading, spending or selling it once you acquire it — you don’t owe any taxes on it, regardless of how the value of the coin might change.
Technically, you don’t functionally experience a gain or loss until the cryptocurrency is no longer in your possession. When you sell, trade or spend the coin, the value difference fully realizes. However, if you never take those actions, there’s no value realization. You can’t be taxed on gains or losses if you’re simply holding the coin because you’re not experiencing any gains or losses.
Trades
When you trade cryptocurrencies, you’re starting to participate in situations that are potentially taxable. Whether you’ll owe taxes depends on how the value of the coin has changed since you purchased it. If the value has gone up, you’ll owe taxes. If not, there may be a loss that you can report to ease your tax burden.
Every time assets are traded, a taxable event occurs. If you make several trades a day, each one is a separate trigging action. As a result, gains and losses for each can impact your taxes, creating a potentially complex taxation situation for you.
Spending
Spending cryptocurrency to purchase a good or service also leads to taxes. The value of the coin is realized once you use it as part of a transaction. As a result, you have to determine the difference between the price at which you purchased it and its value when you spent it. That information will figure into your tax situation.
Cashed-Out Gains
Cashing out crypto leads to taxes, too. Again, whether it’s a gain or a loss matters. However, the sale is an activity you need to report to the IRS. It’s your responsibility to ensure the sale transaction is properly captured and factored into your taxes for that year.
Donating Crypto to Nonprofits
Generally speaking, if you donate cryptocurrency to a tax-exempt organization, it’s a non-taxable event. Instead, you may be eligible for a deduction based on its value. However, you’ll need solid records of the activity to back up that deduction, such as a receipt from the nonprofit and some sort of documentation showing the coin’s value at the time.
Giving or Receiving Crypto Gifts
A crypto gift isn’t taxable when you give it as long as the total amount you gift (or receive) during the tax year remains below the IRS threshold. For the 2021 tax year, that limit was $15,000. If a crypto gift exceeds the threshold, the amount above and beyond the limit is taxable. For instance, if someone gave you $20,000 in Bitcoin in 2021, $5,000 of it would be taxable.
How Is Crypto Taxed?
Because the IRS views cryptocurrency as property, capital gains and losses rules apply. Essentially, you’ll owe taxes based on the difference between the original purchase price and the currency’s value at the time you sell it off (meaning its value is realized). That occurs during trades, sales and purchases.
For example, if you spent $100 on Ethereum and cashed it out when the value was $300, you have a capital gain of $200. That $200 is then taxable. If you purchased $500 in Bitcoin and then sold it for $400, you have a capital loss of $100. With capital losses, you can offset capital gains. Additionally, if your losses exceed your gains, you can deduct up to $3,000 in capital losses in a given tax year. Any excess can carry forward to the next tax year.
With capital gains, the amount you’ll owe in taxes depends on how long you held the asset. That determines whether it’s a short-term or long-term capital gain and will impact your tax rate.
With short-term capital gains, you’re taxed at your usual income rate, which is determined by your total taxable income during the year. Generally, any asset you held for less than a year before a triggering event is considered a short-term holding. Long-term capital gains have lower tax rates in most situations. They’re also based on your income level, though there are only three tiers.
When you’re reporting cryptocurrency activity, you’ll usually need to use Form 8949 to reconcile gains and losses. Then, you can report everything on Schedule D for a Form 1040 return.
New Changes for 2022
There are a few changes that will impact cryptocurrency taxes in 2022. First, the gift limit increased to $16,000. Second, the standard deduction is rising for the 2022 tax year. For individuals and people who are married filing separately, it’s going up by $400. For people who are married filing jointly, it’s growing by $800, and it’s increasing by $500 for head of household filers.
Beyond that, it’s critical to remain vigilant during the year. New regulations or laws that are introduced could impact how cryptocurrency is taxed. As a result, it’s wise to stay on top of emerging legislation to ensure you can adapt to any changes.
