Taxed Right
All Categories

Taxes on Crypto

Crypto-Tax

Before a few days ago there were only a few laws regarding crypto and your taxes. If you made a profit buying and selling cyrptocurrency you had to report it. It was always a matter of time before Congress (and the IRS) would get around to passing a law so they would know exactly how much you made. That day has finally come.

A few days ago Congress passed an infrastructure bill that included reporting of crypto transactions by cryptocurrency exchanges. We are going to let you know what the law is, and what to expect.

Cryptocurrency Exchanges are Brokers

First, what’s a cryptocurrency exchange crypto? It’s a marketplace or platform you can buy or sell cryptocurrency. You can use crypto exchanges to swap one cryptocurrency for another, or to buy & sell cryptocurrencies with US dollars. Popular cryptocurrency exchanges are: Coinbase, Gemini, or Binance.

Per the new bill, cryptocurrency exchanges are now considered “brokers”. A broker is a firm that is a middleman between an individual investor and a public security exchange. Brokers help people buy and sell stocks on public exchanges (like New York Stock Exchange) through their apps & platforms. Examples of brokers are Fidelity, Vanguard, or Robinhood.

Cryptocurrency exchanges are now brokers.

Crypto Broker Reporting Requirements

Cryptocurrency exchanges will now have to provide tax information to you and (your silent partner) the IRS. That means you should expect crypto exchanges to start sending you tax statements that report how much you made buying, selling, and exchanging cryptocurrency.

$10,000 FinCEN for Crypto

Also included in the bill was the requirement that any transfers of $10,000 in Cryptocurrencies need to be reported on a Form 8300 by your cryptocurrency exchange. This is not a new law. This is actually an old law that banks have been dealing with since the 1970s, under FinCEN (The Financial Crimes Enforcement Network). Now both cryptocurrency exchanges and banks have to report these transactions.

What does this mean for you? It means that every time you transfer $10,000 on a cryptocurrency exchange, the government will know.

When do the changes take place?

The new reporting requirements don’t start until the year 2023. Which means cryptocurrency exchanges are not required to send you tax statements (1099-B – from brokers) until February 2024.

But don’t get too excited. Many of these cryptocurrency exchanges will probably start sending you tax forms earlier to show the government that they are following the rules (in fact, many of my clients received 1099-Bs from Robinhood in 2020 for their crypto trades even though the law wasn’t in place yet).

Digital Assets are now like Stocks, Bonds, and other Equities

Written into the new law is that “Digital Assets” (e.g., Bitcoin, Ethereum, NTFs, etc.) are now to be treated as securities in terms of short-term and long-term capital gains. This means that rules regarding stocks and bonds will also apply to the trading of cryptocurrencies. These rules include wash-sale rules, and sales on collectibles. Don’t worry, we will go over these below.

What is Capital Gains tax?

Capital gains tax is a tax you pay on the sale of assets. If you make profit on selling real estate, stocks, or art, you pay capital gains tax. Most people want Long Term Capital Gains (assets you sell after holding it for at least one year), since you pay a lower tax rate. If you want to know more about capital gains tax, we wrote an article about it that you can read here. Now on to the more important stuff.

What is the Wash-Sale rule? Will it effect Crypto?

For those who don’t know, the wash-sale rule says: if you sell a stock at a loss, you will not be able to take a tax deduction if you re-purchase a similar stock within 30 days before or after you sold your stock.

Here is an example:

You buy 100 shares of Apple Inc. stock for $2,000. Some time after, the value of your stock drops to $1,200, so you freak out and sell it at an $800 loss. A week later you change your mind and decide to re-purchase the Apple shares. Because you re-purchased the same stock in under 30 days (in this case 1 week), you are not allowed to take deduction on your tax loss of $800. However, had you waited 30 days to re-purchase your Apple Inc. shares, you could have taken the deduction. You will still be able to deduct the $800 loss, but only after you’ve sold the re-purchased shares.

Even though the bill didn’t address wash-sales directly, don’t be surprised if the IRS issues a public notice that says cryptocurrency transactions are now subject to the wash-sale rules.

What is tax treatment on NFTs?

What’s an NFT (Non-Fungible-Token)? It’s a unique “data set” (computer code) that can be used to easily track digital items such as photos, video, audio, digital art, etc. and verify the ownership of the items. Think of it as owning an original Picasso or Da Vinci, but it’s digital. Trading of NFTs has become popular on NFT marketplaces such as OpenSea or SuperRare.

Long Term Capital Gains 28% on Collectibles

Normally the tax treatment on the sale of assets that are held over 1 year would be considered long-term capital gains (which is 15%-23.8%).

But there’s a special tax rate for collectibles such as Art, Classic Cars, and Precious Metals. That tax rate is 28%. That’s right, if you hold a collectible over 1 year and sell it at a profit, the IRS wants 28% (not 15%-23.8%).

Are NFTs going to be considered collectibles to the IRS? Once again, there were no mention in the bill. Since I use to work at the IRS, let’s just say that I wouldn’t be surprised if the IRS comes back and says they are just like any other collectible and want you to pay 28%.

Conclusion

Keep in mind, this bill was passed recently. We are certain that there will be more changes in the coming weeks. Please check back with us, or subscribe to our free newsletter, to stay up to date & informed.

Additionally, if you need a refresher on capital gains tax or bitcoin & taxes, we’ve written articles on these. Links are below.

Monthly Newsletter

Answers to all of your tax questions