The crypto ecosystem is huge, varied, and constantly expanding. But no matter who you are, or what you’re into, one thing unites us all: the question of crypto tax.
Understanding how your crypto will be taxed is a complicated process, but luckily, there’s a technology that specializes in doing the hard part for you. This innovation helps you not only manage your asset portfolio and track your gains, but also calculate your taxes and generate your crypto tax reports.
In this article, we’ll take one small step toward unraveling the big picture. We explain “what is a taxable crypto event” — enabling you to understand one of the basic principles of how your crypto is taxed.
Knowing Crypto Taxes
Cryptocurrency has seen explosive growth in recent times, and global crypto users are expected to reach 1 billion by December 2022. In the US, around 14% of the population now owns some sort of crypto coin or token.
Beyond the headlines and the technology itself, crypto is an asset, with inherent value. This means that whatever crypto you hold in your portfolio needs to be taken into account as part of your annual tax calculation.
But crypto tax is an intimidating prospect. The blockchain ecosystem offers novel types of interaction for users, such as token swaps, token drops, yield farming and staking — none of which exist in the traditional monetary system. Crypto also offers thousands of different assets, all fluctuating daily (and often wildly) in price.
This mixture of new transaction types and fast-moving parts makes it incredibly complicated for users to understand how the regular tax regulations will apply to their crypto portfolio.
Defining a Taxable Crypto Event
The specifics of tax regulations differ between jurisdictions, so for the purpose of this article, let’s focus on the US tax guidelines.
US taxpayers are subject to tax determined by the Internal Revenue Service (IRS).
A taxable event is any event or action that might result in an adjustment to the taxes owed to the US Treasury. For example, selling or trading assets, or being paid for goods or services in cryptocurrency are all examples of taxable events
Under US tax law, most crypto transactions are taxable. Cryptocurrency is generally treated as ‘property’ NOT currency. This means it is treated similarly to stocks, and will be subject to long-term or short-term capital gains tax. When crypto is paid as interest on an investment or in exchange for goods or services, it will also be taxed as income.
Crypto as a Capital Gain or Loss
Examples of taxable events that would be subject to treatment as capital gains/losses:
- Trading one crypto for another, or for an NFT
- Selling crypto for fiat (fiat is a government-backed currency, like US Dollars or Mexican Pesos)
- Using your crypto to buy goods or services
Short-term crypto capital gains
Let’s use an example to illustrate this. Say you bought Ethereum for $5,000 in June 2021, and sold it for $7000 in October the same year: this would be treated as a short-term capital gain of $2000, and you’d be taxed according to the capital gains schema on that amount.
Long-term crypto capital gains
If you hold your crypto for longer than a year, then you’re subject to the long-term capital tax rate which is typically about half that of the short-term rate.
Along those lines, if you bought an NFT for the equivalent of $20,000 and sold it two years later for the equivalent of $30,000, that $10,000 gain would be assessed at the long-term gains rate.
Crypto capital losses
Losses are treated in the same way, but there’s one key distinction: tax loss harvesting. A future blog post in this series will address this in more depth. For now, a summary: it’s widely held that you can sell your crypto and buy it back again a short time later to lock in losses in the current tax year. That is a distinct advantage of investing in crypto.
Stocks don’t allow you to lock in losses and buy back the stock in less than 30 days because they are subject to the Wash Sale Rule. Right now, crypto is much lower than it was a year ago so many crypto investors are able to take advantage of tax loss harvesting for 2022.
Crypto as Income
Crypto is also subject to income tax rules.
Examples of taxable crypto events that may be treated in this way are:
- Block rewards from mining crypto
- Receiving staking rewards
- Payouts for participation in liquidity pools
- Interest payments from yield farming or DeFi lending
- Airdrops
- Payments for goods or services
For example, say you received rewards from providing liquidity to a crypto lending protocol — those would be counted toward your total income for that tax year. The way this amount would be taxed — and what level of tax it would be subject to — would depend on your overall income for that year across both crypto and fiat. In some cases, that income will be subject to self-employment tax withholding, estimated payments, or traditional withholdings if you’re being paid crypto for your job.
In short, how your crypto is treated will depend on how you acquired it — from there, it will be subject to capital gains tax and income tax. How you’ll be assessed will depend on a slew of variables ranging from how long you held the assets to how much money you’re making from other sources of income.
Final Thoughts
Crypto and fiat are completely separate systems — but your tax obligations will be calculated on the value you hold across both of those systems. Your capital transactions will be taken as a whole, crypto and other assets together. Your income transactions will also be taken as a whole. However, your capital gains/losses are limited in how they can be applied to offset your income tax. Best to consult with a professional if you have questions about how your crypto activity affects your overall tax return.
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