When you are dealing with crypto currency and other crypto assets, don’t forget that they are subject to tax. In fact, a wide range of transactions fall into the category of ‘taxable events’. Understanding what counts as a taxable event and what does not is important to preventing overpaying, underreporting, and facing other compliance issues with the IRS. In this post, let’s take a look at what counts as a taxable event in crypto accounting and explain how a crypto accounting firm like Onchain Accounting can help you stay on top of your tax obligations while investing in crypto with confidence.
What is a taxable event?
In the United States, the Inland Revenue Service (IRS) treats crypto assets like property, not currency. The profits you gain from crypto transactions are taxed depending on how you acquired the asset and how long you held on to it. A taxable event is the term used to define any transaction that is subject to tax by the IRS.
What are the taxable events in crypto?
When you are taxed on crypto, the tax is either a capital gains tax or income tax. The following transactions are considered taxable events:
Taxable Events – Capital Gains/Losses
- Selling, trading, or disposing of crypto assets for USD or any other fiat currency.
- Swapping of one crypto asset to another (crypto-to-crypto swaps)
- Using crypto currency to purchase goods or services.
- Selling NFT for profit
Taxable Events – Income Tax
- Cryptocurrency received through crypto mining
- Staking and airdrops
- Receiving payment/compensation for services in crypto currency.
What are non-taxable events?
Non-taxable events are transactions that are not subject to income or capital gains tax. Recognized non-taxable events include:
- Purchasing crypto currency using a Fiat currency
- Holding a digital asset, regardless of its price appreciation.
- Transfer of crypto assets between wallets
- Transferring crypto assets as a gift
- Donating crypto assets to charity
- Wrapping and unwrapping crypto assets
How is crypto tax calculated by the IRS?
When it comes to crypto tax calculations, First-In, First-Out (FIFO) is the default method used by the IRS.
Under FIFO, it assumes that the first asset in your portfolio is the first asset that leaves the wallet. For example, if you purchased a crypto asset on 1st January for $10,000 and on 1st February for $20,000, and you choose to sell the asset for $30,000 on March 1st, FIFO calculates the tax by deducting the cost basis (i.e., original price) from the selling price.
In our example, that would mean subtracting $10,000 from $30,000, which gives you a capital gain of $20,000. Since FIFO considers the earliest purchase, it can result in a higher capital gain if the asset has appreciated in value. This also translates to a higher capital gains tax.
How can a crypto accountant help?
When it comes to handling your crypto taxes and keeping the IRS away from you, a cryptocurrency accountant is your new best friend. Here’s how a crypto accountant can help:
- Organising and reconciling your crypto transactions.
- Resolving cost basis issues.
- Correctly classifying and organising your crypto transactions.
- Handling complex NFT and DeFi activity.
- Choosing and properly applying the right crypto accounting method
- Helping investors actively maintain good wallet hygiene.
- Preparing accurate tax reports
- Identifying potential tax saving opportunities and implementing tax saving strategies.
- Reducing audit risks and reducing the risk of IRS scrutiny.
Conclusion
Like many financial transactions, crypto transactions are also subject to tax and scrutiny from the IRS. Failing to properly identify taxable events can result in errors, underreporting, and you having to pay more than you should in taxes. That is why crypto accounting is so important – it keeps all your records in order and gives you the peace of mind to invest with confidence.
If you’re looking for a professional cryptocurrency accountant, then Onchain Accounting is here to help. Our team of crypto CPAs specialises in helping investors and businesses identify taxable events, keep records in order, and present strategies that help reduce their tax profile. We businesses and investors have the clarity, accuracy, and confidence needed to make the right call. If you’re interested in our services, let’s get in touch.
