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The US taxation of crypto assets

Crypto assets are a hot topic, and the IRS has shown a strong interest in how they are taxed, by asking about crypto asset transactions in tax returns since 2019, as well as proposing regulations to close loopholes. In this article, we look into the US taxation of such assets.

As a US taxpayer, you’re required to report gains and losses on crypto asset sales on your US tax return, just as you would a capital gain or loss. This is because the IRS views crypto assets as property, as opposed to currency.

The term “crypto assets” covers a broad range of different types of currencies and tokens. There are the more common assets such as Bitcoin or Ethereum, but there are thousands of other smaller currencies too. 

There are many different ways that a taxable event could arise in the crypto asset space, but some example events include;

  • selling crypto for cash;
  • paying for good or services with crypto;
  • receiving mined crypto;
  • exchanging one crypto for another;
  • being paid in crypto; and
  • receiving crypto awards such as staking or interest.

For example, if you purchase a coffee with crypto, the fair market value of the crypto must be converted to US dollars and treated as a disposition on your US tax return. If you are paid in crypto you must convert the crypto received into US dollars and report the payment on your US tax return. There would also be a second tax point at the time the crypto is later sold or exchanged.

The proceeds of a crypto sale must be converted to US dollars on the exchange at the time of sale. Similarly, the cost also has to be converted to US dollars at the time of purchase. Due to the high volume of trades and high fluctuation of crypto values (even minute to minute), the calculations can be complicated. We therefore advise our clients to keep good records of transactions - some crypto wallets provide better information than others. 

The same “short term” or “long term” treatment applies to the capital gains tax treatments as would do to a normal capital asset. As a lot of crypto assets are bought and sold in quick succession, this would lead to their gains being taxed at ordinary income rates as opposed to the lower long term capital gains tax rates. The current administration is proposing to tighten the wash sale rules, meaning the availability to harvest losses will reduce. 

For many crypto holders there is confusion around what has to be reported on their tax return. Some crypto exchanges have begun to issue a tax form known as the 1099-K – but this only reports the total value of transactions and does not factor the “cost basis,” which makes it hard to calculate the taxable gain.

About the author

Allan Wilkinson

+852 3192 7083
wilkinsona@buzzacott.hk
LinkedIn

As a US taxpayer, you’re required to report gains and losses on crypto asset sales on your US tax return, just as you would a capital gain or loss. This is because the IRS views crypto assets as property, as opposed to currency.

The term “crypto assets” covers a broad range of different types of currencies and tokens. There are the more common assets such as Bitcoin or Ethereum, but there are thousands of other smaller currencies too. 

There are many different ways that a taxable event could arise in the crypto asset space, but some example events include;

  • selling crypto for cash;
  • paying for good or services with crypto;
  • receiving mined crypto;
  • exchanging one crypto for another;
  • being paid in crypto; and
  • receiving crypto awards such as staking or interest.

For example, if you purchase a coffee with crypto, the fair market value of the crypto must be converted to US dollars and treated as a disposition on your US tax return. If you are paid in crypto you must convert the crypto received into US dollars and report the payment on your US tax return. There would also be a second tax point at the time the crypto is later sold or exchanged.

The proceeds of a crypto sale must be converted to US dollars on the exchange at the time of sale. Similarly, the cost also has to be converted to US dollars at the time of purchase. Due to the high volume of trades and high fluctuation of crypto values (even minute to minute), the calculations can be complicated. We therefore advise our clients to keep good records of transactions - some crypto wallets provide better information than others. 

The same “short term” or “long term” treatment applies to the capital gains tax treatments as would do to a normal capital asset. As a lot of crypto assets are bought and sold in quick succession, this would lead to their gains being taxed at ordinary income rates as opposed to the lower long term capital gains tax rates. The current administration is proposing to tighten the wash sale rules, meaning the availability to harvest losses will reduce. 

For many crypto holders there is confusion around what has to be reported on their tax return. Some crypto exchanges have begun to issue a tax form known as the 1099-K – but this only reports the total value of transactions and does not factor the “cost basis,” which makes it hard to calculate the taxable gain.

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If you’re a US person and hold crypto assets, please get in touch for assistance working through your US tax obligations arising from the holding or future sale of the assets. 

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