Are Crypto Profits Taxable?

Table of Contents

If you are earning money in the cryptocurrency form in the USA then you may have questions about the crypto profits tax. The main question is whether the cryptocurrency profits are taxable and if so; how to report cryptocurrency on taxes. 

Cryptocurrency Taxing Process

Cryptocurrency Taxing Process - Crypto Profits Tax

Like many others, the USA also has specific regulations relating to tax on cryptocurrencies. These currencies are considered to be capital assets and therefore taxed like capital gains. However, if the currency trading is causing losses then you can deduct such losses against different capital gains and reduce your overall tax liabilities.  So to understand this question that “Crypto Profits Taxable?” You should know first:

Calculating Cryptocurrency Taxes

The process of calculating the cryptocurrency taxes is as follows. 

  • It is the capital gains or loss on the crypto-currencies acquired that works as the main denominator of crypto profits tax payable.
  • The calculation should conform to the tax regulations in the country whether federal or state-based
  • Every taxable event can create a capital gain and thus it covers the time, cost, sale value, and fees associated with the crypto profits. 

Identifying Taxable Events

For calculation of the taxes payable including the income tax on the cryptocurrency, you need to identify the taxable events. Main such events are – 

  • Sale of crypto-currencies to get regular currencies like the US dollar;
  • Trading one crypto-currency for another; 
  • Receiving crypto-currencies from activities like mining etc; and
  • Using crypto-currencies to buy products and/or services.  

Non-Taxable Events

Do many people ask how to avoid capital gains tax on cryptocurrency? For them, it is necessary identifying non-taxable events that include – 

  • Buying crypto-currency using regular currency;
  • Donation of crypto-currency to tax-exempted organizations; 
  • Making small crypto-currency gifts to others; and
  • Transfer of crypto-currencies to another wallet that you own. 

Official Approach on Crypto Profits Tax 

The process of calculating and generating taxes on crypto-currencies in the USA is regulated by the Internal Revenue Service (IRS). The agency issued guidelines on crypto profits tax in the year 2014. The major features of this guideline are as follows. 

  • Crypto-currencies are identified as personal property and taxed as capital assets of the taxpayer; 
  • Use of crypto-currencies for purchase of regular currencies, products, and services will attract capital gains tax; 
  • Crypto-currencies obtained from mining are taxable at a fair market rate. However, mining equipment can be deducted as it is considered to be a legitimate business expense.                           

How Cryptocurrency is Treated by Law (Crypto Profits Taxable)

According to the US taxation laws, all the citizens, as well as residents of the USA, have to pay income tax on their earnings irrespective of their location. This means any citizen and resident earning money anywhere in the world is subjected to tax like those physically residing and working in the USA. Thus the exchange of crypto-currencies by such people is also taxable. In addition to the federal laws, each state also has its taxation policy that applies to crypto-currencies. So Crypto Profits Taxable?

Who are Liable to Pay Crypto Profits Tax

Who are Liable to Pay Crypto Profits Tax

Do you pay taxes on cryptocurrency profits?

If so then you should know who is liable to pay such taxes in the USA. 

  • You are liable to pay taxes if you have traded with cryptocurrencies;
  • If you are receiving a salary or other income as well as gifts in form of crypto-currencies then the income will be subject to regular taxes;  
  • You would be liable for taxes even if you exchange one cryptocurrency with another though not transacting for regular currencies; and
  • In case you are buying crypto-currencies using your own money and not trading then you are not liable to pay any tax on it. 

How Calculation of Capital Gains Work

Calculation of crypto profits tax is usually based on your capital gains. For instance; if you have purchased a bitcoin at the price of $1000 and later use it to purchase properties with it when its value has escalated to $20,000 then your capital gain will be $19,000 and it will be taxable like any other profits made that attracts tax payment. 

You will also be taxed when you earn crypto-currencies as remuneration or another source of income. The value will be added to your taxable income like regular currency-based income. The taxes are to be paid also when you get a gift from others in form of cryptocurrencies like bitcoin and others. While the donor is not taxed unless the amount is huge the recipient of the gift will be liable to pay taxes for the market value of these cryptocurrencies at the time of receipt. 

How to not Pay Taxes on Bitcoin

Bitcoin is the most preferred cryptocurrency in the market. That is why many people ask how to not pay taxes on bitcoin? 

  • If the market value of the bitcoin at the time of earning or receiving as a gift was higher than the transaction value when it is sold or used then this will be a capital loss resulting in tax deduction; and
  • A capital gain accruing later in the process need not be reported since the basis at the time of receipt was higher. 

How it Works

An example can illustrate when you need not report the Bitcoin earnings in tax calculation. Suppose a person bought a bitcoin at $1000 and later transferred it for only $500 to another person. The recipient sells the bitcoin later at $1100 and acquires a long-term capital gain of $100 and not $600 that is taxable because the original base price was $1000.

However, if the recipient sells the bitcoin in the price range of $400-$900 he will be considered to have sustained a capital loss and not liable to pay taxes. However, you should keep records of the date of receipt, donor’s original basis, as well as the date of acquisition as it will help in getting tax exemptions. This was a quite good explanation for this question “Are Crypto Profits Taxable?”

The bottom line

Who are Liable to Pay Crypto Profits Tax - Bottom line

The bottom line of all these is that like regular currencies the cryptocurrencies are also taxable. Also; like the regular currency-based profits the calculation of crypto profits tax also depends on several factors. If you are interested to know how to cut down taxes then we are here to show you the best way. – Reza Abbaszadeh

If you are dealing with Taxes, you also might be interested in Real Estate Taxes

About the author

Abbaszadeh Team

Mr. Abbaszadeh is the founder and CEO of Abbaszadeh Entreprises consists of 4 different companies and multiple divisions within its venture portfolio. In 2019, Reza Abbaszadeh has been awarded as The Youngest Iranian Businessman by Forbes Magazine.