Cryptocurrency Taxation

Do I have to pay income tax on my cryptocurrency (“Crypto”) transactions? Will my Crypto transactions be reported to me? Over the past couple of years, we have heard these questions, and others like them, quite frequently. If you disposed of your Crypto during the year from a taxable account, the short answer is yes. Let me elaborate.

If you simply purchased Crypto during the year and did not sell your interest, you will not have to report the purchase on your income tax return. On the other hand, if you disposed of an interest in Crypto, you will have to report the transaction on your income tax return. Such transactions are typically reported on Internal Revenue Service (“IRS”) Form 8949 and/or Schedule D.

The IRS treats Crypto as property. This means it is treated the same as stocks and bonds from an income tax standpoint if it is held for investment purposes. Like stocks and bonds, Crypto is mostly treated as a capital asset. This means gains or losses are treated as capital gains or losses, which are given more favorable tax treatment than ordinary income. If the position is owned for more than 12 months, any disposition will be treated as long-term. Otherwise, it is treated as short-term. In certain circumstances, Crypto can be treated as ordinary income such as when it is paid to you for services rendered as an employee or independent contractor. Importantly, the wash-sale rule does not apply to Crypto transactions.

To be able to report your Crypto transactions on your tax return, you will need to know when you bought it, how much you paid for it, when you sold it and for how much you sold it. For a stock or bond, this information is provided to you by the custodian that executed the transaction on a Form 1099-B at the end of the year. With Crypto transactions, however, there is currently no requirement for the exchange or custodian that you used to execute the transaction to provide this information to you and most do not. That will change in 2023 though as Crypto exchanges will be required to report Crypto transactions to you on a Form 1099-B. Remember though, that even if a Crypto exchange does not provide you with transaction information, it does not relieve you of your obligation to report the transaction on your income tax return.

If you purchased or sold Crypto in a tax-deferred – think traditional IRA – or tax-free account – think Roth IRA, those transactions are not taxable. However, in a tax-deferred account, you may have to pay income tax when you withdraw money from the account.

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