Cointime

Download App
iOS & Android

What is a Taxable Crypto Event

Validated Individual Expert

The crypto ecosystem is huge, varied, and constantly expanding. But no matter who you are, or what you’re into, one thing unites us all: the question of crypto tax.

Understanding how your crypto will be taxed is a complicated process, but luckily, there’s a technology that specializes in doing the hard part for you. This innovation helps you not only manage your asset portfolio and track your gains, but also calculate your taxes and generate your crypto tax reports.

In this article, we’ll take one small step toward unraveling the big picture. We explain “what is a taxable crypto event” — enabling you to understand one of the basic principles of how your crypto is taxed.

Knowing Crypto Taxes

Cryptocurrency has seen explosive growth in recent times, and global crypto users are expected to reach 1 billion by December 2022. In the US, around 14% of the population now owns some sort of crypto coin or token.

Beyond the headlines and the technology itself, crypto is an asset, with inherent value. This means that whatever crypto you hold in your portfolio needs to be taken into account as part of your annual tax calculation.

But crypto tax is an intimidating prospect. The blockchain ecosystem offers novel types of interaction for users, such as token swaps, token drops, yield farming and staking — none of which exist in the traditional monetary system. Crypto also offers thousands of different assets, all fluctuating daily (and often wildly) in price.

This mixture of new transaction types and fast-moving parts makes it incredibly complicated for users to understand how the regular tax regulations will apply to their crypto portfolio.

Defining a Taxable Crypto Event

The specifics of tax regulations differ between jurisdictions, so for the purpose of this article, let’s focus on the US tax guidelines.

US taxpayers are subject to tax determined by the Internal Revenue Service (IRS).

A taxable event is any event or action that might result in an adjustment to the taxes owed to the US Treasury. For example, selling or trading assets, or being paid for goods or services in cryptocurrency are all examples of taxable events

Under US tax law, most crypto transactions are taxable. Cryptocurrency is generally treated as ‘property’ NOT currency. This means it is treated similarly to stocks, and will be subject to long-term or short-term capital gains tax. When crypto is paid as interest on an investment or in exchange for goods or services, it will also be taxed as income.

Crypto as a Capital Gain or Loss

Examples of taxable events that would be subject to treatment as capital gains/losses:

  • Trading one crypto for another, or for an NFT
  • Selling crypto for fiat (fiat is a government-backed currency, like US Dollars or Mexican Pesos)
  • Using your crypto to buy goods or services

Short-term crypto capital gains

Let’s use an example to illustrate this. Say you bought Ethereum for $5,000 in June 2021, and sold it for $7000 in October the same year: this would be treated as a short-term capital gain of $2000, and you’d be taxed according to the capital gains schema on that amount.

Long-term crypto capital gains

If you hold your crypto for longer than a year, then you’re subject to the long-term capital tax rate which is typically about half that of the short-term rate.

Along those lines, if you bought an NFT for the equivalent of $20,000 and sold it two years later for the equivalent of $30,000, that $10,000 gain would be assessed at the long-term gains rate.

Crypto capital losses

Losses are treated in the same way, but there’s one key distinction: tax loss harvesting. A future blog post in this series will address this in more depth. For now, a summary: it’s widely held that you can sell your crypto and buy it back again a short time later to lock in losses in the current tax year. That is a distinct advantage of investing in crypto.

Stocks don’t allow you to lock in losses and buy back the stock in less than 30 days because they are subject to the Wash Sale Rule. Right now, crypto is much lower than it was a year ago so many crypto investors are able to take advantage of tax loss harvesting for 2022.

Crypto as Income

Crypto is also subject to income tax rules.

Examples of taxable crypto events that may be treated in this way are:

  • Block rewards from mining crypto
  • Receiving staking rewards
  • Payouts for participation in liquidity pools
  • Interest payments from yield farming or DeFi lending
  • Airdrops
  • Payments for goods or services

For example, say you received rewards from providing liquidity to a crypto lending protocol — those would be counted toward your total income for that tax year. The way this amount would be taxed — and what level of tax it would be subject to — would depend on your overall income for that year across both crypto and fiat. In some cases, that income will be subject to self-employment tax withholding, estimated payments, or traditional withholdings if you’re being paid crypto for your job.

In short, how your crypto is treated will depend on how you acquired it — from there, it will be subject to capital gains tax and income tax. How you’ll be assessed will depend on a slew of variables ranging from how long you held the assets to how much money you’re making from other sources of income.

Final Thoughts

Crypto and fiat are completely separate systems — but your tax obligations will be calculated on the value you hold across both of those systems. Your capital transactions will be taken as a whole, crypto and other assets together. Your income transactions will also be taken as a whole. However, your capital gains/losses are limited in how they can be applied to offset your income tax. Best to consult with a professional if you have questions about how your crypto activity affects your overall tax return.

Comments

All Comments

Recommended for you

  • Saudi Arabia Depletes 86% of Patriot Missile Stockpile

    According to British media reports, within the first 38 days after the outbreak of the war, Saudi Arabia launched approximately 2,400 PAC-3 (Patriot-3) interceptor missiles, accounting for about 86% of the country's total stockpile of 2,800 missiles. By April of last year, Saudi Arabia had only about 400 interceptor missiles remaining. Other Gulf Arab states also consumed missile reserves on a similar scale, highlighting the military crisis facing the region. (Jin Shi)

  • Experts: The Strait of Hormuz 'Will Never' Return to Pre-War Status

    Ali Akbar Dareini, a researcher at the Iranian Strategic Studies Center, stated that Iran and Oman are about to reach an agreement on the future management of the Strait of Hormuz, with the main obstacle being U.S. pressure on Oman to adopt a position more aligned with Washington. Dareini emphasized that Iran considers future control of the strait crucial for its national security. In recent months, the U.S. has conducted strikes against Iran, which Iran claims were launched from bases in the region. Dareini noted that the ongoing negotiations between Iran and Oman present the U.S. with a 'good opportunity to extricate itself from this quagmire' by recognizing Iran and Oman as the countries that will determine the 'future' of the Strait of Hormuz. 'However, the Strait of Hormuz will never return to its pre-war status,' he continued. 'The geopolitical landscape of the region has changed.'

  • Iran: Negotiations with Oman Unrelated to Reopening of Strait of Hormuz

    On August 8, a spokesperson for the Islamic Revolutionary Guard Corps of Iran stated that the reopening of the Strait of Hormuz is unrelated to negotiations between Iran and Oman, but rather depends on whether the United States fully accepts Iran's conditions and ceases interference in regional negotiations. "Once the United States accepts Iran's conditions, the Strait will undoubtedly reopen." (CCTV News)

  • Whale Shorting $102 Million in Bitcoin Faces Partial Liquidation, Remaining Liquidation Price Around $65,300

    On August 8, TheDataNerd reported that a whale using 40x leverage to short $102 million in Bitcoin recently faced partial liquidation, incurring a loss of $1.46 million over the past week. Currently, the margin call has reduced the short position to approximately $60 million, with an opening price of $64,212.5 and a liquidation price of $65,310.2.

  • BTC Falls Below $65,000

    Market data shows BTC has fallen below $65,000, currently reported at $64,999.23, with a 24-hour increase of 1.01%. Market volatility is high, please exercise risk control.

  • Hedge Fund AISituational Awareness's Mysterious $400 Million Investment Targets Chip Startup Source Foundry

    On August 8, sources revealed that the hedge fund Situational Awareness, managed by former OpenAI researcher Leopold Aschenbrenner, made a mysterious $400 million investment in the chip manufacturing startup Source Foundry just days after facing imminent collapse. Previously, Bloomberg reported that the hedge fund invested in a private company backed by Sequoia Capital, but did not disclose the name of the specific company. The Wall Street Journal had earlier reported that the recipient of the investment was Source Foundry, unveiling the target of this mysterious funding deployment by Situational Awareness.

  • US Spot Bitcoin ETF Sees $101.79M Net Inflow Yesterday

    On August 8, according to Trader T's monitoring, US spot bitcoin ETFs saw a net inflow of $101.79 million yesterday.

  • US Official: Ukraine Agrees to Avoid Strikes on Non-Russian Tankers and Black Sea Oil Facilities

    On August 8, according to a US official, Ukraine has agreed not to target certain non-Russian tankers and Black Sea infrastructure vital to Kazakhstan's crude oil exports. This follows ship attacks last month that caused loading disruptions. The US official said Ukraine has set up contact points so commercial shipping companies can communicate information and ensure safe passage. The commitment was reached after meetings between senior US government leaders and Ukrainian leadership, marking a potentially significant step toward increasing regional oil shipments. Previously, activity in the region had cooled significantly due to several recent attacks near the Caspian Pipeline Consortium terminal in Russia's Novorossiysk. (Jin Shi)

  • U.S. July Nonfarm Payrolls Fall by 23,000, Missing Market Expectations

    On August 7, U.S. nonfarm payrolls decreased by 23,000 in July, compared with market expectations of an increase of 80,000, and the previous value was an increase of 57,000.

  • US May and June Nonfarm Payroll Additions Revised Down by 103,000 Combined

    On August 7, the US Bureau of Labor Statistics: May nonfarm payroll additions were revised down from 129,000 to 63,000; June nonfarm payroll additions were revised down from 57,000 to 20,000. After the revisions, the combined additions for May and June were 103,000 lower than previously reported.