7 Things to Know About IRS Tax Treatment of Cryptocurrency in 2022

Have you thought about owning cryptocurrency? Wondering about how crypto is taxed? You may be interested in buying cryptocurrency or already own it, and want to learn more about taxation for cryptocurrency.

Crypto profits are taxable—realized cryptocurrency gains generally increase your tax bill. Keep reading to get your head around cryptocurrency and paying taxes to Uncle Sam. 

1. Cryptocurrencies are treated like property by the IRS

The Internal Revenue Service (IRS) treats cryptocurrency like property, rather than regular currency. That means, as far as the IRS is concerned, your bitcoins are more like stocks or real estate than paper money. Treating cryptocurrency like an asset changes how that asset is taxed by the IRS. Most states have yet to issue any guidance or rules regarding cryptocurrency taxation.

2. Cryptocurrency gains can be taxable

Cryptocurrency itself is not taxable by the IRS. But if you buy cryptocurrency that gains value and sell that cryptocurrency to realize a capital gain, then that gain—your profit—can be taxed. Notably, even buying something—anything!—using cryptocurrency can trigger a taxable event.

3. Cryptocurrency taxes vary based on your holding period

If you own a cryptocurrency that gains value and sell it in less than a year, then your capital gain is generally taxed at your ordinary income tax rate. High earners generally pay higher income tax rates, while those with lower incomes generally pay lower income tax rates. 

If you own a cryptocurrency that gains value and sell it after more than a year, then the capital gain is generally taxed at a standard rate regardless of your income. The standard U.S. federal capital gains tax rate is 15%. 

Depending on where you live, you may also owe state tax on your capital gains income.

4. Crypto income must be tracked and reported

You’re on the hook for tracking and reporting your cryptocurrency gains on a net basis. That means keeping track of how much you paid for your crypto at the time of purchase—your cost basis—and how much the cryptocurrency is worth when you sell it. The IRS wants to know, on a net annual basis, the value of your income from crypto.

Cryptocurrency platforms—including crypto IRA platforms like iTrustCapital—can help you to track your cryptocurrency gains and losses. Digital platforms aren’t required to report your crypto earnings to the IRS in the same way that your employer must report your wages, putting the onus on you to declare your crypto earnings.

And, in case you’re wondering—the IRS has previously subpoenaed records from major cryptocurrency exchanges such as Coinbase. Not paying taxes on your crypto gains this year could result in penalties and back taxes.

5. Buying and holding cryptocurrency is generally not taxable*

Simply owning cryptocurrency is not generally taxable. If you buy and only hold your cryptocurrency, whether in a tax-advantaged or taxable retirement account, that cryptocurrency is not taxed. The taxable event occurs at the time of a cryptocurrency sale.

6.  Crypto IRAs can confer tax advantages*

Investors can buy and sell cryptocurrencies in a traditional IRA on a tax-deferred* basis, meaning that all tax liabilities are deferred until the funds are withdrawn from the IRA—provided that certain conditions are met.  Investors in traditional IRAs contribute pre-tax dollars and are later taxed on withdrawals in retirement. 

Investors can also buy and cryptocurrencies in Roth IRAs. With Roth accounts, investors contribute post-tax dollars to their accounts and can withdraw funds tax-free* in retirement—again, provided that certain conditions are met. 

7. You can potentially pay your taxes in cryptocurrency

Paying your taxes using crypto may soon be an option for you. Colorado is moving forward with plans to accept crypto for tax payments, and other states including Arizona and Wyoming are weighing similar proposals. Californians may soon be able to pay for a range of state services using cryptocurrency. Knowing the tax ramifications of crypto is increasingly important, no matter your location.

*Some taxes and conditions may apply. iTrust Capital, Inc. does not provide legal, investment, or tax advice. We recommend seeking the advice of a qualified legal, investment, or tax professional.  

DISCLAIMER

This article is for information purposes only.  It does not constitute investment advice in any way.  It does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any investment strategy.  

iTrust Capital, Inc. is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrust Capital, Inc. is not affiliated with and does not endorse any particular cryptocurrency, precious metal, or investment strategy.  

Cryptocurrencies are a speculative investment with risk of loss. Precious metals are a speculative investment with risk of loss. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation (“FDIC”) insurance or protections. Clients do not receive a choice of custody provider. The self-directed purchase and sale of cryptocurrency through a cryptocurrency IRA have not been endorsed by the IRS or any regulatory agency. Historical performance is no guarantee of future results.  

Some taxes and conditions may apply depending on the type of IRA account. ​​Investors assume the risk of all purchase and sale decisions. iTrust Capital, Inc. makes no guarantee or representation regarding investors’ ability to profit from any transaction or the tax implications of any transaction. iTrust Capital, Inc. does not provide legal, investment or tax advice. Consult a qualified legal, investment, or tax professional. 

iTrust Capital, Inc. makes no representation or warranty as to the accuracy or completeness of this information and shall not have any liability for any representations (expressed or implied) or omissions from the information contained herein. iTrust Capital, Inc. disclaims any and all liability to any party for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this information, which is provided as is, without warranties.

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