- Trading cryptocurrencies produces capital gains or losses, with the latter being able to offset gains and reduce tax.
- Exchanging one token for another — for example, using Ethereum to purchase an altcoin — creates a taxable event. The token is treated as being sold, thus generating capital gains or losses.
- Receiving payments in crypto in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.
- Spending crypto is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for $100. If that coin was then worth $200 and you bought a $200 gift card, there is a $100 taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.
- Converting a cryptocurrency to U.S. dollars or another currency at a gain is a taxable event, as it is treated as being sold, thus generating capital gains.
- Air drops are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it's sold, exchanged, etc., there will be a capital gain.
- Mining coins is considered ordinary income equal to the fair market value of the coin the day it was successfully mined.
- Initial coin offerings do not fall under the IRS's tax-free treatment for raising capital. Thus, they produce ordinary income to individuals and businesses alike.
https://www.cnbc.com/2018/01/30/cryptocurrency-and-taxes-wha...
Which is absurdly difficult for the average person to account for. If I buy 60000 XRP for 4 BTC, what is my cost basis? Do I have to keep track of how much those bitcoins were worth on a different exchange with Fiat pairings at the moment I traded on a pure crypto exchange? What if I don't have that data? How is that calculation supposed to account for actual liquidation costs if I liquidate to pay my taxes?
For the BTC? The USD value at the time you bought them.
> Do I have to keep track of how much those bitcoins were worth when I traded?
Yes
> What if I don't have that data?
You can get the transaction date via the block chain or your exchanges reporting and then lookup the USD value at the time.
> How is that calculation supposed to account for actual liquidation costs if I liquidate to pay my taxes?
Liquidating to pay taxes is another taxable event. That’s the same as if you did this with equities.
What if the exchange I traded on doesn't have a USD Fiat pairing? Can I use any price from any exchange that day? Can I report $0.06/BTC for an xrp sale on 4/16, the date of the major coinbase flash crash? Does it have to be the exact price at the exact time? Can I choose the USD value of the KRW/BTC market on Bithumb?
You should report your taxes as honestly as possible, using reasonable prices for things.
You should use the fair market value.
I want to pay my taxes. I believe crypto should be taxed. But when you get into the situation where well meaning people have to take guesses at what is appropriate, and differences between seemingly simple rules of thumb can result in 20+% disparities in taxes owed, you're gonna have a bad time no matter how diligent you are.
Neither is easy to value, but the rules for doing so are well-defined.
The only thing that's new about this is that the average person can more easily get themselves into a difficult tax situation than before these tokens existed. That's in turn because of the SEC accredited investor rules and other countries' equivalents, which make these tough securities rarely accessible to ordinary folks without financial & tax sophistication. The accredited investor definitions have a lot of flaws, but not the idea behind having such a barrier.
And, indeed, the SEC and foreign equivalents are starting to pay more and more attention to cryptocurrency... The rules are still the rules, as much as people don't like it.
Can’t be a very good trader, that is for true...
> report their cryptocurrency earnings
At some point, stellar converted lumens to stellar. Anyone know if that would be considered a taxable event? Did that change my basis?
You're citing existing precedents/case law that has been decided. The cryptocurrency cases have not yet been adjudicated by the tax court, so as an individual filer, I would be comfortable taking any reasonably justifiable position and defending it in audit if needed.
I would put more weight on the possibility of considering it a 1031 like-kind exchange, than a tax free merger/reorganization . Although I don't have a lot of exposure to the 1031 rules to know if there's a clear objection there.
Holy crap do we need reform.
It seems perfectly reasonable to me that income is income regardless of whether it is dollars or magic beans and that gains on investments are taxed largely without regard for the form of the investment.
[1]: if we're pragmatic about it, cryptocoins can't be used for much on their own
1. Wash sale rules (where buying a substantially identical security within 30 days before or after a sale-for-a-loss disallows the loss)
2. Section 1031 exchanges
The only reform I see needed is that exchanges could help facilitate reporting these transactions.