The short answer is Yes, you must pay taxes on cryptocurrency. Here’s why:
The Internal Revenue Service (IRS) estimates that less than 25% of cryptocurrency gains are being reported to the IRS, leading to a $688,000,000,000 tax gap in 2021 alone. That’s a LOT of zeros!
Given that discrepancy, it’s no wonder the IRS is introducing a new strategy for recuperating lost income tax on cryptocurrency—Form 1099-DA will be used for reporting digital asset transactions beginning in tax year 2025.
Be sure to visit us again when filing your 2025 income tax return in early 2026 for the latest updates concerning cryptocurrency.
For now, follow these guidelines to report cryptocurrency on your 2024 tax return.
Understanding Cryptocurrency Taxation for Tax Year 2024
Cryptocurrency has quickly become a mainstream asset, and with its growing popularity comes a lot of questions, not the least of which are income tax considerations. If you’re investing, trading, or simply holding digital currencies, it’s important that you understand how the IRS views your crypto transactions.
The IRS classifies cryptocurrency as property—not currency—which means that any gains or losses from its sale or exchange are treated like stocks or real estate. This classification has significant implications for your tax liability and reporting requirements in tax year 2024. The bottom line: Any sale, trade, or conversion of cryptocurrency must be reported on your 2024 tax return, using Form 8949 and Schedule D.
When Do You Have to Pay Taxes on Crypto?
You must pay taxes on cryptocurrency when you buy, sell, or otherwise dispose of your digital assets in a taxable event.
Taxable events include:
Selling crypto for traditional currency: Converting your digital asset into dollars or another government-issued currency triggers a taxable event.
Trading one cryptocurrency for another: Even if no fiat, or traditional, currency is involved, swapping one crypto for another can result in capital gains or losses.
Using crypto to purchase goods or services: When you pay with cryptocurrency, you’re technically selling it, which may generate taxable income.
Receiving crypto as income: Whether you’re paid in cryptocurrency for goods or services, or you earn it through mining or staking, this income is taxable.
Capital Gains and Losses for Tax Year 2024
If you sell or trade cryptocurrency at a profit, you’ll incur a capital gain, which may be short-term or long-term depending on how long you held the asset.
Conversely, if you sell at a loss, you can use that loss to offset other capital gains. It’s essential to keep detailed records of the purchase and sale dates, values at the time of transactions, and any associated fees to accurately calculate your gains or losses (irs.gov).
When Crypto Is Considered Income for Tax Year 2024
Cryptocurrency received as payment for services, from mining, or as a reward is considered ordinary income. This means its value at the time of receipt must be reported as income on your tax return. It’s similar to receiving a paycheck but with the added challenge of tracking the fluctuating value of crypto assets.
The Importance of Accurate Record-Keeping
Proper documentation is key when dealing with cryptocurrency taxes. Maintain a thorough record of every transaction including:
The date and time of the transaction.
The fair market value at the time of the transaction.
The purpose of the transaction.
Any fees associated with buying, selling, or transferring cryptocurrency.
Reliable record-keeping not only makes tax season less stressful but also helps protect you in case of an audit.
Frequently Asked Questions
Do I owe taxes if I just hold cryptocurrency?
Simply holding your cryptocurrency in a wallet does not trigger a taxable event. Taxes are only due when you dispose of the asset in a transaction.
What if I lost access to my crypto wallet?
While you might not owe taxes on the lost asset, you could miss out on potential capital gains or deductions. It’s wise to consult a tax professional if you face such an issue.
Are there penalties for not reporting crypto transactions?
Yes, failure to report cryptocurrency transactions can result in penalties and interest, so it’s crucial to be thorough and accurate in your filings.
It is important to also note that, due to the loss of income tax reported on crypto in the recent past, auditors are actively looking for discrepancies involving cryptocurrency on tax returns.
Key Takeaways
So, do you have to pay taxes on cryptocurrency?
The answer is Yes—if you sell, trade, or otherwise dispose of it in a way that creates a gain or loss, or if you receive it as income for goods or services, those transactions are taxable.
Staying informed and keeping meticulous records are your best defenses against costly mistakes during tax season. By understanding the basics of cryptocurrency taxation and taking proactive steps in record-keeping, you can ensure that your digital asset management aligns with current tax laws, avoiding unexpected liabilities and penalties along the way.
If you’re in doubt about your crypto tax obligations, consult a tax professional at AMG Finance for the clarity and guidance you need to achieve peace of mind when filing income taxes involving cryptocurrency.
