U.S. crypto taxes
By Geoffrey Lyons
Crypto taxation in the U.S. is a complex policy area that’s still being refined.
Here’s the Who, What, Where, Why, and When of U.S. crypto taxes.
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Who: The IRS + individual states
Uncle Sam collects the lion’s share of crypto taxes through the Internal Revenue Service (IRS), but then each U.S. state also has its own tax rules.
California, for example, imposes a high income tax and aggressive sales tax, making it one of the most expensive states for crypto users. Meanwhile Wyoming leaves crypto subject only to federal rates.
In short, where you live in the U.S. can make all the difference.
What: Property, not currency
Taxes hinge on definitions. In the UK, the popular “Jaffa Cakes” snack would be taxed differently if it were classified as a “cake” rather than a “biscuit” (which is why there was such a heated legal battle over this exact issue).
The IRS defines crypto as “property, not currency”, which is an important distinction because it makes crypto generally subject to capital gains tax (taxes on profits made by selling an asset).
For example, if you were to exchange $100 U.S. dollars for goods or services, no capital gains tax would be incurred. It would be considered a routine transaction with legal tender. But if you were to exchange $100 worth of BTC for goods or services, this would be a taxable event subject to capital gains tax. E.g. if you initially bought the BTC when it was $50, your $50 profit (capital gain) would be taxable.
Interesting fact
If you earn crypto - e.g. if your employer pays you in BTC - this is taxed as ordinary income, not capital gains.
Where: Crypto’s trade ports
Just like trade ports where ships come and go, platforms through which crypto enters or exits the traditional financial system are typically where tax events are triggered.
Reputable platforms follow tax rules and report to tax authorities. Some large platforms even provide users with tax documents.
But this doesn’t mean all peer-to-peer transactions outside these ports are not taxable. If someone pays you for work in Bitcoin, that’s a taxable event. Peer-to-peer transactions of different tokens are also taxable events. For example, if you swap Bitcoin for Ethereum with your friend, the IRS treats this as a Bitcoin sale and an Ethereum purchase, meaning you owe capital gains tax on any profit made from the trade.
Why: The tax debate continues
Why does the U.S. tax crypto as capital gains tax instead of, for example, “private money” like Germany or “miscellaneous income” like Japan?
This is still up for debate and will continue to be a point of contention as long as there’s no consensus on how crypto should be defined. Is it a currency like dollars? A commodity like gold? A security like stocks? Perhaps it’s a new category entirely, one that regulators have yet to fully grasp.
Until there's more clarity, it’s safe to assume this policy area will remain a moving target.
When: What’s next for U.S. crypto taxes?
The President’s son, Eric Trump, has promised to exempt U.S.-based cryptocurrencies from capital gains tax (all others would face a 30% tax).
Individual states are also tweaking their rules. A recently proposed bill in Ohio, for example, would bar taxes on crypto payments.
Aside from this, crypto taxation remains a logistical challenge for governments all over the world, not just the U.S. Crypto’s decentralized nature means tax agencies sometimes have difficulty linking activity to specific taxpayers, and all the different ways crypto trades hands - air drops, staking, yield farming - create additional layers of complexity.
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