AT TAX TIME, WHO REALLY OWNS THAT CRYPTO ANYWAY? - EXPERT TAKE

The world of cryptocurrency is exciting and rapidly evolving, offering new opportunities for investment and financial transactions. Exactly how much you'll pay depends on the fair market value of the crypto at the time of the transaction. Independent contractors and freelancers are subject to paying self-employment tax on crypto received as payment. Meanwhile, businesses need to pay business income tax on profits earned by accepting crypto as payment. Taxable Event No. 2:But as tax season rolls around, a critical question arises: At Tax Time, Who Really Owns That Crypto Anyway? It might seem straightforward, but understanding the nuances of crypto ownership for tax purposes is essential to avoid potential pitfalls with the IRS.Unlike traditional assets, crypto's decentralized nature and complex transaction types can create confusion regarding who is responsible for reporting and paying taxes on gains or losses. Every investor's situation is unique, and crypto tax laws can vary by state and country. At Boulanger CPA, we're always here to help you navigate the choppy waters of cryptocurrency taxation. Whether you're a casual investor or a hardcore crypto enthusiast, we've got the expertise to ensure you're compliant and optimizing your tax strategy.This expert take delves into the intricacies of crypto ownership and taxation, providing a comprehensive guide to help you navigate the often-murky waters of digital asset taxation.From understanding taxable events to determining the fair market value of your crypto holdings, this article will equip you with the knowledge you need to stay compliant and potentially optimize your tax strategy.Whether you're a seasoned crypto trader or just dipping your toes into the digital asset space, comprehending the tax implications of your crypto activities is crucial for financial well-being.

Cryptocurrency as Property: The IRS Perspective

The first thing to understand is that the IRS views Bitcoin and other cryptocurrencies as property, not currency.This distinction is critical because it means that virtually any transfer or disposition of cryptocurrency can trigger a taxable event.This could be a purchase, a sale, or even a swap.

Think of it like owning a stock. At Tax Time, Who Really Owns That Crypto Anyway? EXPERT TAKE Bitcoin and other cryptocurrency is a property for federal tax purposes. That can be painful since just about any transfer of property can trigger taxes. Even crypto for crypto swap cannot qualify as a tax-free 1031 exchange, according to the Tax code.When you sell stock for more than you bought it for, you realize a capital gain, and you owe taxes on that gain. At Tax Time, Who Really Owns That Crypto Anyway? - Expert Take In our Expert Takes, opinion leaders from inside and outside the crypto industry express theirCrypto works similarly.

Taxable Events: What Triggers a Tax Liability?

Understanding what constitutes a taxable event is paramount.Here are some common scenarios that trigger tax implications when dealing with cryptocurrencies:

• Selling Crypto for Fiat Currency (USD, EUR, etc.): This is the most straightforward scenario. Get up to speed on important rules about crypto and other alternative investments for this tax season with CPA and TurboTax expert Lisa Greene-Lewis.If you sell Bitcoin for U.S. dollars and make a profit, you'll owe capital gains taxes on the difference between the selling price and your cost basis (the original price you paid for the Bitcoin).
• Trading Crypto for Crypto: Even swapping one cryptocurrency for another (e.g., Bitcoin for Ethereum) is considered a taxable event.The IRS treats this as selling your Bitcoin and then using the proceeds to buy Ethereum.
• Using Crypto to Purchase Goods or Services: When you use cryptocurrency to buy something, you're essentially selling your crypto for the fair market value of the goods or services you're receiving. The IRS is taking steps to root out unreported cryptoasset transactions, as is evident from the newly prominent question on page 1 of the 2025 Form 1040, U.S. Individual Income Tax Return: At any time during 2025, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? Additionally, theThis can also result in a taxable gain or loss.
• Receiving Crypto as Payment: If you're an independent contractor, freelancer, or business owner and you receive crypto as payment for your services or products, that crypto is considered taxable income.You'll need to report the fair market value of the crypto at the time you received it.Furthermore, independent contractors and freelancers are also subject to self-employment tax on crypto received as payment.Businesses, similarly, must pay business income tax on profits earned by accepting crypto.

Example: Let’s say you bought 1 ETH for $2,000. Even crypto for crypto swap cannot qualify as a tax-free 1031 exchange, according to the Tax code. For tax purposes, transfers are treated as sales unless you can find some other way ofYou then trade that 1 ETH for 0.5 BTC when 1 BTC is worth $5,000.You’ve effectively sold your ETH for $2,500 (0.5 BTC x $5,000).You would have a capital gain of $500 ($2,500 - $2,000), which you would need to report on your taxes.

Determining Ownership and Tax Liability

While the concept of ownership seems simple, in the context of cryptocurrency, it can become complex, especially when dealing with:

• Joint accounts
• Custodial wallets
• Decentralized exchanges (DEXs)
• Decentralized autonomous organizations (DAOs)

Joint Accounts and Shared Wallets

If you share a crypto wallet or exchange account with someone else, determining ownership for tax purposes can be tricky.Generally, each individual is responsible for reporting their share of the gains or losses based on their contribution to the initial investment.

Best Practice: Keep detailed records of who contributed what amount to the shared wallet or account.This will help you accurately allocate gains and losses when tax time comes around.If the contributions are uneven, document the agreed-upon percentages of ownership.

Custodial vs.Non-Custodial Wallets: Who's in Control?

The type of wallet you use can also impact how you're perceived to ""own"" the crypto for tax purposes.Here's the difference:

• Custodial Wallets: These wallets are managed by a third party, such as an exchange (e.g., Coinbase, Binance).The exchange holds the private keys to your crypto, meaning they technically have control over your assets.However, for tax purposes, you are still considered the owner of the crypto held in your custodial wallet.
• Non-Custodial Wallets: These wallets give you complete control over your private keys.You (and only you) have access to your crypto.Examples include hardware wallets (like Ledger or Trezor) and software wallets (like Metamask or Exodus).Since you have sole control, you are clearly the owner for tax purposes.

Regardless of the type of wallet, you are responsible for reporting any taxable events related to the crypto held within it.

Decentralized Exchanges (DEXs) and DAOs: A Gray Area?

Decentralized exchanges (DEXs) and decentralized autonomous organizations (DAOs) present unique challenges to the concept of ownership.DEXs allow you to trade crypto directly with other users without a central intermediary.DAOs are organizations run by rules encoded in computer programs (smart contracts), often with token holders participating in governance.

Determining ownership and tax liability in these contexts can be complex, and the IRS has not yet provided clear guidance on all situations.Generally, if you are actively participating in a DAO and earning tokens or rewards, those tokens may be considered taxable income.Similarly, if you are trading on a DEX and realize a gain, you are responsible for reporting that gain.

Calculating Your Cost Basis and Fair Market Value

A crucial aspect of crypto taxation is accurately calculating your cost basis and fair market value.These figures are essential for determining your capital gains or losses.

What is Cost Basis?

Your cost basis is the original price you paid for the cryptocurrency, including any fees associated with the purchase.It represents your investment in the asset.

Example: You buy 1 Bitcoin for $30,000 and pay a $10 transaction fee.Your cost basis for that 1 Bitcoin is $30,010.

What is Fair Market Value?

Fair market value (FMV) is the price that a willing buyer would pay a willing seller for the cryptocurrency at a specific point in time.It's typically determined by the prevailing market price on a reputable exchange.

Why FMV Matters: The fair market value is crucial when you're:

• Selling crypto for fiat currency.
• Trading crypto for crypto.
• Using crypto to purchase goods or services.
• Receiving crypto as income.

Example: You receive 0.1 BTC as payment for freelance work.At the time you receive it, 1 BTC is worth $50,000.The fair market value of the 0.1 BTC you received is $5,000, which you'll need to report as income.

Methods for Calculating Cost Basis: FIFO vs.Specific Identification

When you've purchased the same cryptocurrency at different times and prices, you need to choose a method for determining which units you're selling when you dispose of them.The IRS allows you to use different methods, but you need to be consistent.

• First-In, First-Out (FIFO): This method assumes that you're selling the oldest units of cryptocurrency you own first.
• Specific Identification: This method allows you to choose which specific units of cryptocurrency you're selling.This can be more advantageous if you're trying to minimize your tax liability.However, you need to be able to specifically identify the units you're selling, often through blockchain transaction records.

Example (FIFO): You buy 1 BTC in January for $20,000 and another 1 BTC in March for $30,000.You sell 1 BTC in June for $40,000.Using FIFO, you're assumed to have sold the BTC you bought in January for $20,000.Your capital gain would be $20,000 ($40,000 - $20,000).

Example (Specific Identification): In the same scenario, you can specifically identify that you are selling the BTC bought in March for $30,000.Your gain would then be $10,000 ($40,000 - $30,000).

The Importance of Accurate Record-Keeping

Given the complexities of crypto taxation, meticulous record-keeping is essential.You should keep track of the following information for every crypto transaction:

• Date of the transaction
• Type of transaction (purchase, sale, trade, etc.)
• Amount of cryptocurrency involved
• Fair market value of the cryptocurrency at the time of the transaction
• Cost basis of the cryptocurrency
• Wallet addresses involved
• Fees paid

There are several tools and software programs available that can help you track your crypto transactions and calculate your tax liability.Using one of these tools can save you a significant amount of time and effort.

Tools and Software for Crypto Tax Reporting

Consider using crypto tax software such as:

• CoinTracker
• Koinly
• ZenLedger
• TaxBit

These platforms can automatically import your transaction data from various exchanges and wallets, calculate your capital gains and losses, and generate the necessary tax forms.

Understanding Capital Gains and Losses on Cryptocurrency

When you sell or dispose of cryptocurrency at a profit, you realize a capital gain.If you sell or dispose of it at a loss, you realize a capital loss.The tax rate that applies to your capital gains depends on how long you held the cryptocurrency before selling it.

Short-Term vs.Long-Term Capital Gains

• Short-Term Capital Gains: These apply to crypto assets held for one year or less.They are taxed at your ordinary income tax rate, which can be significantly higher than the long-term capital gains rate.
• Long-Term Capital Gains: These apply to crypto assets held for more than one year.They are taxed at preferential rates, typically lower than ordinary income tax rates.The exact rate depends on your income level.

Tax Tip: Holding your crypto assets for longer than a year can significantly reduce your tax liability due to the lower long-term capital gains rates.

Using Capital Losses to Offset Gains

If you have capital losses from selling crypto, you can use those losses to offset your capital gains.If your capital losses exceed your capital gains, you can deduct up to $3,000 of the excess loss from your ordinary income each year.Any remaining losses can be carried forward to future tax years.

The IRS is Watching: Crypto Tax Compliance is Crucial

The IRS is increasingly focused on crypto tax compliance.They are taking steps to identify and prosecute individuals who are not reporting their crypto transactions accurately.As evidenced by the question on page 1 of Form 1040: ""At any time during [the tax year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"" It's clear they are looking closely at digital asset activity.

Consequences of Non-Compliance: Failure to report your crypto transactions accurately can result in penalties, interest charges, and even criminal prosecution.The best way to avoid these problems is to be proactive about understanding and complying with the tax laws.

Seeking Professional Guidance

Navigating the complex world of cryptocurrency taxation can be challenging.If you're unsure about any aspect of your crypto tax obligations, it's always best to seek professional guidance from a qualified tax advisor or CPA.They can help you understand your specific tax situation, ensure that you're complying with all applicable laws, and potentially identify opportunities to optimize your tax strategy.At Boulanger CPA, for example, experts are available to help navigate the cryptocurrency taxation landscape.Whether you're a casual investor or a hardcore crypto enthusiast, it's wise to get expert advice.

Common Crypto Tax Questions

Here are some frequently asked questions regarding cryptocurrency taxes:

Does a crypto donation qualify for a tax deduction?

Yes, donating cryptocurrency to a qualified charitable organization can be tax-deductible.You can typically deduct the fair market value of the donated crypto at the time of the donation, but there are certain limitations.

Can I use a 1031 exchange to defer taxes on crypto trades?

Unfortunately, 1031 exchanges, which allow you to defer taxes on the exchange of ""like-kind"" property, typically do not apply to cryptocurrency exchanges.Crypto is viewed as property, not real property, for tax purposes.

What happens if I lost my private key and can't access my crypto?

If you permanently lose access to your cryptocurrency due to a lost private key, you may be able to claim a capital loss on your taxes.You'll need to provide evidence of the loss, such as documentation showing the purchase price of the crypto and the circumstances surrounding the loss.

Are staking rewards and mining income taxable?

Yes, staking rewards and mining income are generally considered taxable income.The fair market value of the rewards or income at the time you receive them is taxable.This may also be subject to self-employment tax.

Conclusion: Staying Ahead of the Crypto Tax Curve

Navigating the world of cryptocurrency taxes requires vigilance, meticulous record-keeping, and a thorough understanding of applicable regulations.The IRS treats crypto as property, meaning almost every transaction is a taxable event.Calculating your cost basis, determining fair market value, and choosing the right accounting method (like FIFO or specific identification) are all critical components.Moreover, the IRS is increasing its scrutiny of crypto transactions, making compliance essential to avoid penalties and legal issues.Ultimately, seeking professional advice can provide clarity and help you navigate this complex landscape.Remember, understanding At Tax Time, Who Really Owns That Crypto Anyway? is the first step to being compliant and maximizing your investment’s potential.By staying informed and proactive, you can navigate the tax implications of your crypto investments with confidence.Don't hesitate to seek professional guidance to ensure you're on the right track!