CryptoTips: Deciphering US Tax Liability

Cryptotip #1: Because the IRS considers cryptocurrency to be property, profits earned from the appreciation of your crypto portfolio are taxed as capital gains. If you’ve held your investment for at least 366 days, then it qualifies as a long-term capital gain, subject to either zero, 15 or 20 percent tax, depending on your tax bracket. If you’re cashing out sooner than 366 days after your purchase, you owe short-term capital gains tax. Short-term capital gains are taxed at your ordinary tax rate.

Cryptotip #2: Capital gains taxes aren’t the only ones you owe. If your state has an income tax, you’ll need to pay that, too. Depending on how much crypto you sold last year, you may also owe Net Investment Income Tax. You may have other tax liabilities, too, and if your income is high enough, some tax deductions and credits will be phased out.

Cryptotip #3: You might be self-employed and don’t know it. Miners and day traders may be considered self-employed, and subject to self-employment tax. Check with your CPA. Self-employment could also entitle you to certain deductions, so it’s not all bad.

Cryptotip #4: Those who traded one cryptocurrency for another might or might not have tax liability. The tax code provides for so-called “like-kind” exchanges (Section 1031), but the IRS has yet to rule on whether crypto-to-crypto trades qualify. Check with your CPA on this. You definitely should know, however, that from 2018 forward, crypto-to-crypto transactions will not be considered like-kind exchanges and will be subject to capital gains tax due to the tax reform law passed last year.

Cryptotip #5: Depending on your tax circumstances, the Alternative Minimum Tax (AMT) may apply to you. If AMT applies, you will owe more in taxes than you might be expecting. Check with your CPA.

Cryptotip #6: The IRS is aware that cryptocurrency investors made billions last year, and the budget-strapped agency definitely wants their share. They have hired a firm called Chainalysis to scrutinize digital currency Blockchains and attempt to link wallet addresses to real identities. Also, your bank probably filed certain paperwork if you cashed out a large amount of cryptocurrency.

The author is not a CPA nor an attorney, and nothing in this article should be construed as legal or tax advice.