Taxable Events In The Crypto World: What Triggers A Tax Obligation?

Cryptocurrency has gained widespread popularity as an investment and a means of exchange, but its rise has also brought new complexities when it comes to taxes.

Many crypto investors and users are unaware that certain transactions trigger taxable events, which can result in significant financial and legal obligations.

Whether you’re trading, spending, or mining cryptocurrency, it’s essential to understand what the IRS considers a “taxable event” or “reporting event,” or both.

In this post, we’ll break down the various crypto events that are considered taxable and what you need to know to stay compliant with tax regulations.

Taxable Crypto Events

 The following crypto events are taxable:

1. Crypto Sales: Selling your cryptocurrency for fiat currency (like USD) is a taxable event. The tax you owe depends on whether you’ve made a gain or loss compared to your original purchase price (cost basis).
2. Crypto-to-Crypto Conversions: Converting one cryptocurrency to another (e.g., Bitcoin to Ethereum) is also a taxable event. The IRS treats this as if you sold one crypto for cash and then used that cash to buy another crypto.
3. Payments Made with Crypto: Using cryptocurrency to pay for goods or services is treated as a sale of your crypto and is therefore taxable. You’ll need to calculate the difference between your cost basis and the fair market value of the crypto at the time of the transaction.
4. Crypto Income: Receiving cryptocurrency as income is taxable. That includes:

• • Mining rewards
  • Staking rewards
  • Interest from crypto lending
  • Airdrops
  • Payment for goods or services

Non-Taxable Crypto Events

Not all crypto activities trigger a tax event. Here are some examples:

1. Buying and Holding: Simply purchasing crypto with fiat currency and holding it is not a taxable event.
2. Receiving Crypto as a Gift: If you receive crypto as a gift, you don’t report or owe taxes on it until you sell or exchange it. (But, if you receive Crypto as a reward, award, or payment for property or services, you must answer “Yes” to the Digital Assets section on your Form 1040.)
3. Giving Crypto as a Gift: Gifting crypto to someone else is not a taxable event for you (the giver). However, if the gift exceeds the annual gift tax exclusion ($18,000 for 2024), you may need to file a gift tax return (Form 709).
4. Transferring Crypto Between Your Own Wallets: Moving your crypto between wallets or exchanges that you own is not a taxable event.

Understanding Crypto Capital Gains vs. Income

When it comes to cryptocurrency, understanding the difference between capital gains and income is essential for accurate tax reporting.

Crypto Capital Gains: Capital gains occur when you sell or exchange your cryptocurrency for more than you paid for it. These are further divided into:

• Short-term capital gains: For crypto held for one year or less. These are taxed at your ordinary income tax rate.
• Long-term capital gains: For crypto held for more than one year. These are typically taxed at lower rates (0%, 15%, or 20%, depending on your tax bracket).

Crypto Income: Crypto received as income (like mining rewards or payment for services) is taxed as ordinary income at your regular income tax rate. The amount of income is based on the fair market value of the crypto at the time you received it.

The Importance Of Record-Keeping

Given the complexity of crypto taxes, it’s crucial to keep detailed records of all your crypto transactions. That includes:

• Date of purchase
• Cost basis (purchase price plus fees)
• Date of sale or exchange
• Sale price or value at the time of exchange
• The specific coins involved in each transaction

IRS Reporting Thresholds and Crypto Transactions

All taxable events, regardless of the amount, should be reported on your tax return.

However, the IRS has focused on a $600 threshold for certain types of reporting:

Until Tax Year 2024

1. Form 1099-K: Crypto exchanges are required to issue a Form 1099-K to users who have more than 200 transactions AND more than $20,000 in volume in a year. However, this form doesn’t typically capture all taxable events.
2. Form 1099-MISC: Some exchanges issue Form 1099-MISC for crypto rewards or earnings over $600.
3. Form 1099-B Substitute: Some taxpayers hire independent companies to analyze their transactions during the tax year and prepare Form 1099-B equivalent to prepare Schedule D, Form 8949 to report the capital gain income or loss.

 Tax Year 2025

Starting with the 2025 tax year, new reporting requirements will come into effect:

New Form 1099-DA: The IRS has introduced Form 1099-DA, a new tax form specifically designed for digital asset transactions. Crypto exchanges and brokers will use this form to report user trading activity to both the IRS and the taxpayers themselves. Any user with gross proceeds exceeding $600 will receive a 1099-DA.

Remember, even if you don’t receive a Form 1099 from an exchange, you’re still responsible for reporting all taxable crypto events on your tax return.

However, with Form 1099-DA in play, the IRS will have much more visibility into your crypto activities, making it easier to identify discrepancies and non-compliance.

If you’ve neglected to report your cryptocurrency transactions in past tax years – whether due to confusion about the requirements, losses that you thought didn’t need reporting, or the mistaken belief that the IRS couldn’t trace them – you should contact Sammy Kim, an experienced cryptocurrency tax attorney in the Fairfax, VA area, to discussion your options now.

Frequently Asked Questions on Cryptocurrency Taxes

How do I calculate my crypto taxes if I’ve made multiple trades throughout the year?

Calculating taxes for multiple trades can be complex. You’ll need to determine the cost basis and sale price for each transaction. Many crypto investors use specialized crypto tax software or work with tax professionals to accurately calculate their gains and losses.

Are fees associated with crypto transactions tax-deductible?

Yes, transaction fees can typically be added to your cost basis when you acquire crypto or subtracted from your proceeds when you dispose of crypto. That effectively reduces your capital gains or increases your capital losses. However, fees for general investment advice or account maintenance are usually not tax-deductible for individuals.

What happens if I lose access to my crypto wallet? Can I claim a tax loss?

Unfortunately, losing access to your crypto wallet generally doesn’t qualify as a tax loss. While it can be a significant financial loss, the IRS typically treats cryptocurrency as property. Losing access, even due to theft or hacking, doesn’t mean you’ve sold or disposed of the asset.

How are hard forks and airdrops taxed?

According to IRS guidance, cryptocurrencies received from hard forks or airdrops are taxed as ordinary income based on their fair market value at the time you gain control over them. That value then becomes your cost basis for future sales or exchanges. 

Do I need to report my crypto activities if I’ve only received crypto but haven’t sold or exchanged it?

While simply buying and holding crypto isn’t a taxable event, you may still need to report your crypto holdings. The first page of IRS Form 1040 asks whether you’ve engaged in any virtual currency transactions during the tax year in the “Digital Assets” section right below the Filing Status section. You should answer “yes” to this question if you received (as a reward, award, or payment for property or services) a digital asset or a financial interest of a digital asset, even if you haven’t sold or exchanged it. However, you won’t owe any taxes until you dispose of the crypto in a taxable event.