Is Converting Crypto a Taxable Event?

If you’re thinking about converting your crypto into cash, you may be wondering if it’s a taxable event. The answer is maybe – it depends on a few factors. Read on to learn more about how taxes apply to crypto conversions.

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Introduction

Some taxpayers may convert cryptocurrency to fiat currency (e.g., U.S. dollars) or other cryptocurrency to pay for goods or services, utilize crypto-to-crypto exchanges to buy different types of cryptocurrency, or “cash out” their cryptocurrency with initial coin offerings (ICOs), among other transactions. These activities may trigger taxable events. Depending on the specifics of the transaction, and how long you held the cryptocurrency, you may have to pay capital gains tax. You may also be subject to ordinary income tax on the non-investment income you realized from the transaction.

What is a taxable event?

A taxable event is an occurrence that results in a tax liability. For example, if you sell a piece of property for a profit, you will have to pay capital gains tax on the transaction. Similarly, if you earn income from dividends or interest, you will be responsible for paying taxes on that money.

In the world of cryptocurrency, there are a few different types of taxable events that could trigger a tax liability. The most common is selling or exchanging cryptocurrency for fiat currency (like dollars or euros). This is considered a taxable event because you are converting your crypto into another asset, and the IRS views this as a form of income.

Another common taxable event is exchanging one type of cryptocurrency for another. For example, if you trade your Bitcoin for Ethereum, this is considered a taxable event. This is because you are effectively selling your Bitcoin and buying Ethereum, which counts as an exchange of property.

Finally, if you use cryptocurrency to purchase goods or services, this is also considered a taxable event. This is because the IRS views crypto as property, and when you use it to make purchases, you are effectively selling that property and paying for goods or services with the proceeds.

If any of these events occur, you will be responsible for paying taxes on the transaction. The amount of tax owed will depend on a number of factors, including the type of event that occurred and the value of the crypto involved in the transaction.

What is considered income from cryptocurrency?

The IRS considers cryptocurrency to be property, so converting it to cash is a taxable event. When you sell Bitcoin or other crypto for cash, you have to report the gain or loss on your tax return.

Here’s how it works: Let’s say you bought one Bitcoin for $8,000 in January 2018. You held onto the Bitcoin and then sold it in December 2018 for $12,000. You would have a $4,000 gain, which is subject to capital gains tax.

What if I convert my cryptocurrency to another currency?

If you convert cryptocurrency to fiat currency, you have to report that transaction. For example, if you trade £100 worth of Bitcoin for £200 worth of Ethereum, you’ll need to report that on your tax return.

The good news is, if you make a profit on the exchange, that might not be taxable. It all comes down to whether or not the cryptocurrency is considered a personal asset or an investment.

What if I use cryptocurrency to purchase goods or services?

Similarly to bartering, if you use cryptocurrency to purchase goods or services, you will be taxed on the fair market value of the goods or services received at the time they were received. Fair market value is determined by what a willing buyer would pay to a willing seller, both of whom are knowledgeable, informed, and acting independently of each other.

What if I hold cryptocurrency as an investment?

If you hold cryptocurrency as an investment, you may have to pay taxes on any gains when you sell it. Generally, this is treated as a “realized gain,” meaning you pay taxes on the difference between what you paid for the cryptocurrency and what you sold it for. For example, let’s say you bought one Bitcoin for $1,000 two years ago. If you then sold that Bitcoin when it was worth $10,000, you would have a realized gain of $9,000. You would then owe taxes on that $9,000 based on your marginal tax rate.

What if I mine cryptocurrency?

If you earn cryptocurrency through mining, you will be taxed on the income from the date that the crypto is first mined. If you later convert the crypto to another currency, you may be subject to capital gains taxes.

What if I receive cryptocurrency as a gift?

Generally, the taxable event is when you sell or exchange cryptocurrency. So, if you give cryptocurrency as a gift, the tax consequences will depend on whether you have held the cryptocurrency for more than one year.

If you have held the cryptocurrency for more than one year, then the recipient will owe capital gains tax on the appreciation in value of the cryptocurrency. The amount of tax will depend on whether the recipient is in a lower or higher tax bracket than you.

If you have held the cryptocurrency for less than one year, then the recipient will owe ordinary income tax on the value of the cryptocurrency at the time it was received. Again, the amount of tax will depend on whether the recipient is in a lower or higher tax bracket than you.

What if I inherit cryptocurrency?

The inheritance of cryptocurrency is a taxable event. If you receive cryptocurrency as part of an inheritance, you will be required to pay taxes on the value of the cryptocurrency at the time of inheritance.

What if I dispose of cryptocurrency?

If you dispose of cryptocurrency, you may have a capital gain or loss. This will happen if the disposal is of a CGT asset acquired for more than its cost base, and you are not an excluded entity. You also need to be able to work out the relevant crypto asset’s cost base.

If you make a capital gain, you include it in your assessable income. If you make a capital loss, you can deduct it from any other capital gains you made in that financial year. You can also carry it forward to future years.

What records do I need to keep?

When you report your cryptocurrency on your taxes, depending on how you acquired it, you may need to include:
-The date you bought the cryptocurrency
-The date you sold the cryptocurrency
-The amount you paid for the cryptocurrency in USD
-The amount you sold the cryptocurrency for in USD
-The type of crypto (Bitcoin, Ethereum, etc.)

What if I don’t report my cryptocurrency transactions?

If you do not report your cryptocurrency transactions, you may be subject to civil and criminal penalties. The IRS has stated that failure to report cryptocurrency transactions can result in penalties including fines, imprisonment, and a failure to pay taxes on the income from the transactions.

Conclusion

Based on the information above, it appears that converting crypto is a taxable event in the United States. If you have any additional questions, please consult a tax professional.

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