How Taxes Work On Cryptocurrency

Cryptocurrency is still a newer phenomenon in the income tax world. We've found most cryptocurrency holders aren't fully aware of the tax handling of these investments.....

While cryptocurrency is still difficult to track because it's a virtual currency, the IRS and state taxing authorities have stepped up their tracking of this "underground world" significantly in recent years.

According to the IRS, cryptocurrencies are treated as property for federal tax purposes, meaning the taxation of these investments is similar to that of regular stocks.

How It Works
If the fair market value of the property or cash received in exchange for the crypto exceeds the taxpayer's adjusted basis (usually the purchase price), then the taxpayer has reportable gain, which is subject to capital gain tax rates. For example, crypto purchased at $3 and sold at $10 would yield a $7 gain for purposes of capital gain taxes.

If the opposite is true and the fair market value received is less than the basis, the taxpayer has a reportable loss. Crypto purchased at $10 and sold for $4 would have a $6 reportable loss.

Crypto Tracking
The difficulty for many crypto investors lies in tracking the basis. That's because taxpayers generally aren't receiving a 1099-B form upon liquidating the investment, like they would generally receive when selling ordinary stock. 1099-B forms usually help layout the necessary elements to calculate the gain or loss upon sale of property.

So what do crypto investors do?

It's important to keep detailed and accurate records of transactions. These days, the larger cryptocurrency exchanges usually keep records for investors. Recently, several independent services have come out offering tracking capabilities. It may be worth enlisting one of these resources to alleviate the headache and possible issues with negligent tracking.

In the end, the IRS expects you to accurately report your cost basis and proceeds with cryptocurrency. There is no leniency given in this area. Crypto ignorance is not tax-free bliss in the eyes of the IRS!