Cryptocurrency Taxes 101: Myths and Misconceptions of Owning It

Cryptocurrency is here to stay. Bitcoin has now been around since 2009, and even with many hard knocks it continues to grow substantially in value. Other cryptocurrencies, such as Ethereum have also become good investments. A lot of people are now putting their money on Cardano, (I am hoping to win big from Cardano!) but putting all your money in different cryptocurrencies is far from diversifying. It is still wise to own stocks in and out of a retirement account, own real estate, gold or silver, or other investments. My favorite investment is to own a business!

The IRS actually classifies cryptocurrency as property, and not a currency. Why? Because even though it is very popular, it is not universally accepted.

Calculating taxes owed on Crypto is extremely time consuming and detailed. The biggest misconception on cryptocurrency taxation is from people thinking trading one cryptocurrency for another is not taxable. For example, each time someone trades Bitcoin for Cardano, that is a taxable event. I think people confuse trading cryptocurrencies with trading stocks inside a retirement account. They are not the same. Trading stocks inside a retirement account is not taxable, and only taxed once when taking distributions.

Many people also don’t realize that each time cryptocurrency is used to purchase something, that is a taxable event. (Yes, that is a little crazy!) Here is an example to explain it: If you had Cryptocurrency worth $1,200 and then when you bought a TV for $1,000, when the Cryptocurrency was valued at $1,400, there would be a $170 capital gain ($1,400 – $1,200 = $200, $200 / $1,200 = 17%, $1,000 * .17 = $170). The gain would be short term, if held under one year, and long term if held over one year.

The IRS has put pressure on Cryptocurrency exchanges to send 1099’s to traders with their gains, or they shut down the Cryptocurrency exchange. The 1099 shows the trader’s overall gain or loss to enter on their tax return. If the trader does not receive a 1099, its more on the “honor system” to claim the gains or losses on schedule D of their personal tax return.

Personally, I would rather use a secure Cryptocurrency exchange like Coinbase and have to pay taxes, rather than a shady cryptocurrency firm where you might wake up the next day at your cryptocurrency is gone. This is a common occurrence.

Here’s a final tip: Current rumors say that the biggest target of the IRS is bitcoin miners!