Since cryptocurrency is still relatively new, it is common for people to be unsure how to include it on their taxes. To make matters even more complicated, regulations related to crypto may still change, including details of their status as taxable income. Keep in mind that the following information is just for taxes in the United States, unless otherwise stated. If you pay taxes in another country, you will need to check the specific tax regulations regarding crypto there or consult an expert.
The most important thing to keep in mind when dealing with cryptocurrency on income taxes is that it is indeed taxable. The IRS actually outlined the most common questions and answers in Notice 2014-21, with some updates over the years. The exact way that you report and pay taxes on crypto will depend on the specific circumstances of use.
Cryptocurrency that is used as payment for services and goods gets taxed just like any other income. This means that if you have employees that you pay using crypto, you have to report those earnings on a W-2 form. Keep in mind that at the time of each payment, you must record the converted value of the given Bitcoin or another crypto in USD. It is also key to note that wages paid in crypto have the same withholding as USD wages.
From the perspective of the employee, you have to report your W-2 duties in the form of USD. Those who are self-employed will also need to convert their crypto to USD and report the appropriate quantities on their taxes.
Since mining is an important part of many cryptocurrencies, there are also specific tax instructions for crypto profit from this avenue. The IRS determined that mining Bitcoin or another crypto is part of your gross income. As with other situations, you will convert the virtual currency’s value to USD at the time of the receipt. In the case of self-employed crypto miners, the self-employment tax will also apply.
If you simply hold your cryptocurrency in the form of a capital asset, then it will be taxed in the form of property. The same rules will apply as they would with any other capital asset, including bonds or stocks. As such, those who trade cryptocurrency will report their capital losses or gains from exchanges and sales.
Overall, cryptocurrency tends to be taxed the same as US dollars, at least in the United States when paying taxes to the IRS. If any of your assets or profits are in the form of virtual currency, you will likely need to calculate the appropriate value in USD and include that figure on your taxes. Remember that since crypto is still relatively new, the current IRS rules for crypto may change in the future, but this information is accurate at the time of writing.