Cryptocurrency’s meteoric surge in popularity has left many tax professionals with questions: What are crypto’s tax implications? Which crypto activities do my clients need to report? How much does crypto get taxed?
Insider Intelligence estimates that 12.8% of the U.S. population will own cryptocurrency by the end of 2022, a figure that has more than doubled since 2020. If your firm is not already familiar with current crypto tax accounting policies, now is the time to catch up.
You don’t need to be a crypto tax expert to help your clients. Get to know the basics of the Internal Revenue Service (IRS) cryptocurrency regulations so your firm can be prepared when your first crypto client files their taxes.
What is cryptocurrency and how does the IRS classify it?
Cryptocurrency or “crypto” is digital money designed to be used on the internet. Crypto is not owned by a single entity (e.g., central bank, government) and transactions take place on a decentralized system. Crypto has gained popularity in online commerce because of its speed, security, and ability to make direct transfers without an intermediary.
The IRS identifies cryptocurrency as property for federal tax purposes. Your clients’ cryptocurrency gains and losses receive the same treatment as any other capital asset. The same tax rates and holding length rules apply.
Almost all cryptocurrency transactions incur a taxable event and must be reported on Form 8949. Taxpayers must report the following events as taxable income:
- Receiving wages in the form of cryptocurrency
- Accepting cryptocurrency in exchange for goods and services
- Acquiring cryptocurrency from staking and mining
Reporting capital gains for cryptocurrency
Clients that buy or sell goods and services with crypto or invest in crypto must report the transactions as capital gains. Cryptocurrency follows the same capital gains tax rate as normal assets for federal taxes.
How much does crypto get taxed? Short-term capital gains (less than one year) have a tax rate of 10-37% while long-term capital gains (longer than one year) have a tax rate of 0-20%.
IRS: 2022 short-term capital gains tax rate
| Tax rate | Single filer | Married filing jointly | Head of household |
|---|---|---|---|
| 10% | $0 to $10,275 | $0 to $20,550 | Up to $14,650 |
| 12% | $10276 to $41,775 | $20,551 to $83,550 | $14,651 to $55,900 |
| 22% | $41,776 to $89,075 | $83,551 to $178,150 | $55,901 to $89,050 |
| 24% | $89,076 to $170,050 | $178,151 to $340,100 | $89,051 to $170,050 |
| 32% | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 |
| 35% | $215,941 to $539,900 | $431,901 to $647,850 | $215,951 to $539,900 |
| 37% | Over $539,900 | Over $647,850 | Over $539,000 |
IRS: 2022 long-term capital gains tax rate
| Tax rate | Single filer | Married filing jointly | Head of household |
|---|---|---|---|
| 0% | $0 to $41,675 | $0 to $83,850 | $0 to $55,800 |
| 15% | $41,676 to $459,750 | $83,351 to $517,200 | $55,801 to $488,500 |
| 20% | Over $459,750 | Over $517,200 | Over $488,500 |
What constitutes a disposable event?
The IRS considers the following cryptocurrency transactions to be disposable events:
- Trading cryptocurrency for fiat currency
This follows the same capital gain and loss treatment as it would for other stocks and bonds.
- Trading one cryptocurrency for another cryptocurrency
When exchanging two cryptocurrencies, they must be marked as two separate transactions: the sale of one crypto and the purchase of another. Even if no gains or losses occur, the sale and purchase must be reported separately.
Are any cryptocurrency transactions non-taxable?
Cryptocurrency that is bought and held without any further action taken does not have to be reported. Nor does transferring cryptocurrency from one wallet to another, provided that both wallets are owned by the same individual.
Does the wash-sale rule apply to crypto tax accounting?
The IRS subjects stocks and securities to what’s known as a wash-sale rule. This regulation was implemented to dissuade investors from selling assets at a loss to claim a tax benefit. In short, the rule requires investors to wait 30 days between the sale and repurchase of a security when a tax deduction is involved.
Since cryptocurrency is treated as property, it is not subject to the IRS wash-sale rule. Investors are allowed to sell and immediately repurchase crypto to mitigate capital gains taxes. This may change, however. Lawmakers are engaged in ongoing discussions about applying these same preventative measures to virtual currency. As of May 2022, no regulations have been enacted.
Are there tax deductions for crypto donations?
Charitable contributions with cryptocurrency are deductible, but the deduction varies based on the length of the holding period:
- Long-term acquisitions: Deductions are equal to the value of the cryptocurrency at the time of the donation.
- Short-term acquisitions: You should limit the deduction to the donor’s tax basis in donated cryptocurrency rather than its fair market value.
Addressing bottlenecks in crypto tax accounting
Don’t be intimidated by the tax implications of cryptocurrency. Although it may be subject to new regulations in the future, crypto still currently receives the same IRS treatment as any other capital asset.
Retrieving crypto information from your clients may be more complex. Not all crypto exchanges and wallets provide the necessary documentation to easily calculate the cost basis of a gain or loss. Some larger crypto exchanges provide a Form 1099-B for their users, but most only provide a 1099-K or 1099-MISC. That leaves tax professionals in a difficult spot.
Preparing returns for clients that own crypto? Technology can help you navigate this problem. Shehan Chandrasekera, CPA and CoinTracker Head of Tax Strategy, provides special insight in our webinar recording:
Nuts and bolts of cryptocurrency taxes
View WebinarDisclaimer: The information contained within this document is provided for informational purposes only and is not intended to and must not be taken as a substitute for obtaining accounting, tax, legal, or other professional advice from a tax professional (e.g., an Enrolled Agent, CPA, attorney, etc.). No warranty or representation, express or implied, is made by SurePrep, part of Thomson Reuters, nor does SurePrep, part of Thomson Reuters, accept any liability with respect to the information and data set forth herein. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. You should consult a professional advisor and/or legal counsel prior to acting on the information set forth herein.