How is crypto taxed?

It’s very likely you’ve heard of Bitcoin, perhaps the best known of what are now estimated to be nearly 23,000 cryptocurrencies^†. It’s also likely that with so many players on this complex field, investment opportunities will increase. And as consumers buy and sell these assets, many are unaware of the income tax consequences triggered under various circumstances.

In 2022, the IRS announced Operation Hidden Treasure, their effort to identify cryptocurrency exchanges that may not have otherwise been reported. These exchanges include the buying and selling of the cryptocurrencies themselves along with other purchases made using cryptocurrencies. If you own cryptocurrencies, or are considering an investment, it is essential that you are aware of the rules to avoid accidentally triggering additional regulatory scrutiny^‡.

Potential crypto tax implications

The IRS has taken the position that the following transactions should be reported:

• As payment for property or services provided
• Resulting from a reward or award
• Resulting from mining, staking and similar activities
• Selling/Disposing of digital assets in exchange for property or services
• Disposing of a digital asset in exchange or trade for another digital asset
• Selling a digital asset
• Otherwise disposing of any other financial interest in a digital asset

Non-taxable events

Owning a digital asset alone doesn’t automatically trigger a taxable event. The following are some examples of scenarios that likely do not require extra reporting to the IRS:

• Simply holding digital assets in a wallet or account.
• Transferring digital assets from one wallet or account to another wallet or account that the same person owns or controls.
• Purchasing digital assets using U.S. or other real currency, including through electronic platforms.

Why it matters

Although many people think of cryptocurrencies as substitutes for actual currency, for tax purposes they’re treated as property. Consequently, the rules associated with capital gains and losses will generally govern a potential tax liability. As one example, when selling cryptocurrency, the normal rules of property sales and taxation, apply. Consequently, a sale may trigger short-term or long-term capital gains (or losses) depending on how long you have held the asset.

Here are other examples:

• Basis can be calculated using the fair market value of the cryptocurrency (in U.S. dollars) as of the date of purchase.
• When a cryptocurrency is gifted to someone the basis carries forward and must be used by the new owner when calculating future taxes.
• If a taxpayer receives payment in the form of cryptocurrency, it must be reported as ordinary income as of the date that it is received. This income could trigger FICA taxes and withholding requirements.
• When making payments using cryptocurrencies the 1099-MISC is the form that can be used to report such transactions.
• When a taxpayer "mines" new cryptocurrency that new asset counts as income when received. In most cases, the IRS has taken the position that this income is subject to self-employment tax.
• To track this specific issue, the IRS added a question to the 2020 Form 1040 which asks if the taxpayer "received, sold, exchanged, or otherwise acquired (or disposed) any financial interest in any virtual currency."
• Individuals or companies that facilitate payments in cryptocurrency for third parties have additional reporting requirements.

Getting the advice you may need

A failure to properly report a transaction involving cryptocurrencies could lead to unanticipated tax penalties. We suggest that you work with your tax advisor to ensure that your cryptocurrency transactions and activity are properly reported for income tax purposes. Please contact your Huntington Private Bank^® team to see how we can help, or find a Huntington Private Bank Office near you.