Cryptocurrencies are a particularly complicated asset for tax purposes. Digital assets are still assets as far as Arizona state and federal tax laws are concerned. Gains are taxable and losses can potentially be written off.
Don’t assume that the sale or purchase of cryptocurrencies is invisible to the government. Just because the blockchain doesn’t have your name in it does not mean you can’t be identified via an exchange account or other recordkeeping related to the sale and purchase of cryptocurrencies or other digital assets. The safest approach is transparency, as exchanges may end up reporting transactions to the IRS even if you don’t.
Despite being called a “currency” and looking for all intents and purposes like fungible assets, cryptocurrencies are considered property rather than a traditional currency. Any gains, losses or income you have related to cryptocurrency transactions should be treated the same way the purchase and sale of other property would be treated.
As capital assets, cryptocurrencies are subject to capital gains taxes.
Cryptocurrency exchanges that serve customers in the United States are legally required to comply with the Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. These laws require exchanges to verify the identity of users by collecting information like name, address and date of birth.
The primary goal is to prevent money laundering and illegal activity like terrorism financing, but mandatory reporting also makes it more difficult for people to hide transactions made through the exchange from the IRS.
Not every major exchange sends their users a Form 1099. If you don’t receive a 1099 from your crypto exchange, you should report all your cryptocurrency disposals on Form 8949. You should list ALL your crypto transactions on this form, regardless of whether it resulted in a gain or a loss.
You also technically need to fill out the Form 8949 if you used cryptocurrency to make a purchase. Since the government views it as a property class, not a currency, using it to buy a good qualifies as a trade.
The IRS has added a specific cryptocurrency question to Form 1040. Filers must inform the IRS if, at any time in the tax year, they received, sold, sent, exchanged or otherwise acquired a digital asset. This technically covers assets like NFTs as well.
The IRS does look for reporting discrepancies in individual tax filings, exchange reporting and other information sources. It’s best not to assume that your transactions are invisible, even if you don’t use one of the major exchanges.
Mining cryptocurrency is treated slightly differently than trading digital assets. The IRS views successful mining as regular income, meaning the value of the cryptocurrency at the time it was mined is taxable and should be reported. The income you should report will depend on the dollar value of the cryptocurrency on the day of receipt.
If you’re mining as a self-employed business activity, the income will also be subject to self-employment tax, meaning you’ll need to pay Social Security and Medicare taxes based on the value of the cryptocurrency. Income and expenses related to crypto mining should be reported on a Schedule C profit and loss form for businesses.
Maybe the biggest challenge cryptocurrency traders face is the difficulty in reporting high-frequency trading. Every transaction should be recorded and reported, which may require you to fill out many copies of Form 8949. A 1099 from an exchange is not a substitute for Form 8949 – you should provide both in your tax filing.
Details matter to the IRS, and it’s important to keep records and report every transaction.
Many people who actively trade cryptocurrencies end up needing tax filing help, especially if they’re a high-frequency trader or initiated many transactions over the course of the tax year.
The team at H&H Accounting Services is here to help. Our expert tax filers and business consultants would be happy to advise and assist on your cryptocurrency tax planning and preparation. Call us at (480) 561-5805 to schedule a free one-hour consultation.
