Monday, May 30, 2022

The tax implications of cryptocurrency

If you have created cryptocurrency through a "mining" process, did you pay income tax on the resulting cryptocurrency? The IRS regards it as an asset and it requires payment of income tax, at ordinary income rates, when it is acquired. It does not matter that it has resided in a "wallet" since then and has not been used or converted. If it could have been used as money or converted to dollars, it is a taxable asset and the creation of that asset is regarded as recognition of income. (See IRS notice 2014-21)

If you acquire a unit of a cryptocurrency by purchase, there is no income recognized and no income tax owed. You have traded dollars for other units at the then-effective price. The purchase price becomes your cost basis for purposes of determining later capital gains or losses. 

Cryptocurrency that has changed in value since it was originally acquired generates capital gains or losses whenever it is spent or converted. It is a long-term capital gain (or loss) if it is held for more than one year, and the act of spending it or converting it results in the recognition of that gain (or loss), with an accompanying tax obligation. Depending on your income level, the tax on a LTCG is 0%, 15%, or 20%. 

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