Assuming you aren’t getting paid crypto for work you do (more on that further below), the IRS generally views bitcoin and its brethren as property, not currency, for tax purposes. This means that whether you sell any crypto for cash, trade it for another digital currency or use at a merchant that accepts it as payment, the difference between what you initially bought it for — your cost basis — and its value upon sale is either a gain (profit) or a loss.
“The taxable transaction is not only when you convert to U.S. dollars,” Wimberly said. “It can occur at any point you sell or exchange it.”
Depending on the crypto exchange you use and how many transactions you engage in — and the aggregate dollar amount — you may receive a Form 1099-K. Even if you don’t receive it, there are reporting requirements.
If you have a gain, you’ll be taxed on it. As with other other investments like stocks, if you held it for one year or less, any profit you made is considered a short-term gain and is taxed as ordinary income. Depending on your tax bracket for 2020, that could range from a rate of 10% to 37%.
Any crypto held for more than one year that generates a profit when sold is taxed as a long-term gain at a rate of 0%, 15% or 20%, depending on your income.
If there’s a loss, you can generally use it against other income or investment gains, up to $3,000, and carry over the rest to subsequent years.
Crypto as payment
If you received any virtual currency as pay for work performed, you are expected to report that, as well.
The difference is that, in that scenario, the crypto is treated like wages — which are subject to ordinary income taxes, as well as self-employment taxes for those who are paid as a nonemployee and receive a 1099-NEC from the business that paid the crypto, Hauer said.
Again, even if you don’t receive a form, that does not relieve you of your responsibility to report the income and pay any taxes owed.
If you need to report crypto income both because you had 2020 gains and you received it as compensation, the amounts gets entered in separate spots on your tax return.
For example, say that last year you sold bitcoin for a gain of $10,000 and also were paid by a business with $20,000 worth of bitcoin.
“On your 2020 tax return, you would add $10,000 as a capital gain to any profits from stocks that were sold and $20,000 as income to any other wages or 1099-NEC income that was earned,” Hauer said.
Also, any cryptocurrency that you mine must be included in your taxable income.