Do I Need to Report Cryptocurrency Income on My Tax Return?

 Posted on February 12, 2024 in Taxation Law

In recent years, cryptocurrencies such as Bitcoin, Ethereum, and Ripple have gained significant popularity and value. As more people participate in cryptocurrency transactions or receive digital assets as income, the question of whether these assets need to be reported on tax returns has become increasingly important. For those who have questions about their reporting requirements or who may be concerned about penalties for failure to report crypto transactions, an attorney who understands the applicable tax laws can provide invaluable guidance.

Taxation of Cryptocurrency

The IRS treats cryptocurrency and other digital assets as property for tax purposes, which means that they are subject to capital gains tax rules similar to stocks and other investments. Any income or gains derived from buying, selling, or trading cryptocurrencies may be taxable. When virtual currency or other digital assets are received as income, they must be reported on a tax return, and income taxes will apply.

When Must Taxpayers Report Digital Assets?

Tax return forms for 2023 include a question asking whether a taxpayer has received any digital assets as payment or has sold or disposed of digital assets. A person or entity will be required to answer “yes” if any of the following are true:

• They received digital assets as payment for goods or services rendered (e.g., salary payments, bonuses, or in return for other assets).

• They received digital assets as an award or reward.

• They received cryptocurrency through mining, as a result of a “hard fork,” or through other similar methods.

• They exchanged digital assets in return for goods or services.

• They exchanged cryptocurrency for other digital assets.

• They sold digital assets and received currency issued by the United States or another country.

• They disposed of a financial interest in digital assets in any other manner.

All income from the sale, transfer, or exchange of digital assets must be reported. Capital gains or losses must be calculated, and the applicable taxes must be paid. The value of digital assets received as wages must be reported as income, and any applicable income taxes must be paid.

A taxpayer will not be required to report cryptocurrency that has not been sold, transferred, or exchanged. Holding assets in a digital wallet, transferring assets from one wallet or account to another, or purchasing cryptocurrency using currency from the United States or another country will not require a taxpayer to report their digital assets to the IRS.

Types of Digital Assets That Must Be Reported

The IRS guidelines make it clear that the reporting requirements apply to all types of digital assets. These include:

• All virtual currencies, including popular cryptocurrencies like Ethereum, Litecoin, Ripple, and others, as well as lesser-known “altcoins.”

• Stablecoins, which are virtual currencies that are tied to a country’s currency or other assets that have a stable value that is less likely to change regularly. 

• Non-fungible tokens (NFTs), which are unique digital identifiers that signify ownership of artwork, videos, or other assets of value.

Taxes on Cryptocurrency Income

The tax treatment of cryptocurrency income will generally depend on how long a taxpayer held the assets before selling or exchanging them. The IRS divides capital gains into two categories: short-term and long-term capital gains. Short-term capital gains apply when an asset is sold within 1 year after it was acquired, whereas long-term capital gains will apply after an asset has been held for longer than 1 year.

If a taxpayer receives cryptocurrency as payment for services rendered or mining activities, the fair market value of that digital currency is included in their gross income for that tax year. This amount is subject to federal income taxes at ordinary rates based on their filing status.

For transactions involving selling, transferring, or exchanging cryptocurrencies:

• If a taxpayer sells digital assets within 1 year of acquisition, any gain will be considered short-term and taxed at regular income tax rates according to their applicable tax bracket. Tax rates may range from 10% to 37%.

• If a taxpayer holds digital assets for longer than 1 year before selling them, any resulting gain will be treated as a long-term capital gain with potentially lower tax rates. In these cases, tax rates may range from 0% to 20%.

Contact Our San Jose Tax Law Attorney

Given the complex nature of cryptocurrency taxation rules, it is advisable to consult with a qualified tax attorney who can ensure that digital assets will be reported correctly. At John D. Teter Law Offices, our San Jose tax lawyer can help ensure compliance with IRS regulations. If necessary, we can help you analyze how to minimize any penalties that may apply to cryptocurrency transactions that were not reported correctly. Contact us at 408-866-1810 to get dedicated, experienced legal help with tax-related issues.