Six Tax Items Every Cryptocurrency Investor Should Know - The Little CPA (2024)

As you can imagine, tracking these taxable transactions requires specialized knowledge.

Crypto investors should seek out a tax professional like Charles J. Kelly, CPA, also known as “CJ The Smart Guy,” who has educated thousands of investors on the tax treatment of digital assets.

As the CEO of Smart Guy Consulting and a member of the Black Bitcoin Billionaire organization, he educates his community about investing, generational wealth and tax planning.

Here is his breakdown of common cryptocurrency transactions:

• If you buy = not taxable.
• If you hold = not taxable.
• If you borrow against = not taxable (note, loan interest paid might be tax deductible.)
• If you sell, trade or buy goods and services = taxable.

When you sell or exchange capital assets, including virtual currency, you engage in a capital gains transaction.

CJ The Smart Guy encourages investors to buy Bitcoin and never sell. For those who do sell, he emphasizes that, “If you hold crypto longer than a year, you are taxed at a favorable long-term capital gains rate.”

CJ also helps investors legally obtain the most favorable tax treatment on their capital gains. When applicable, he uses one of the following identification methods to determine the cost basis of each virtual asset:

• First In, First Out (FIFO),
• Last In, First Out (LIFO),
• Highest In, First Out (HIFO), or
• Specific Identification.

By identifying the most favorable cost basis, he helps taxpayers reduce the size of their capital gain. This minimizes the capital gain income subject to tax.

3. Reportable Events

Just because a crytpo transaction isn’t taxable, doesn’t mean it’s not reportable.

Let’s break it down.

Receiving, selling, sending, exchanging, or otherwise acquiring virtual currency are all reportable events.

Page 1 of Form 1040, Individual income Tax Return, has a whole section regarding reportable Digital Asset transactions. If at any time during 2023, you

• (a) received (as a reward, award, or payment for property or services); or
• (b) sold, exchanged, or otherwise disposed of a digital asset (or any financial interest in any digital asset),

You must report on your 1040 accordingly.

Keep in mind, if your only transactions were purchases of cryptocurrency with real currency, you are not required to answer “Yes,” to the Form 1040 question.

Large Cryptocurrency Transactions

Effective from January 1, 2024, individuals receiving $10,000 or more in crypto transactions are now required to report detailed information to the IRS within 15 days, facing the risk of felony charges for non-compliance.

The reportable detailed information includes:

• names,
• addresses,
• SSN/ITIN numbers,
• amount paid,
• date,
• nature of transaction,
• etc.

This reporting requirement which is detailed in IRC Section 6050I is not a new rule. It was originally part of an anti-money laundering bill dating back to 1984.

The recent update came through the Infrastructure Bill signed into law by President Biden, extending its scope to cover digital assets.

The application of 6050I primarily targets those involved in a trade or business who receive crypto receipts exceeding $10,000.

However, the definition of “trade or business” is broad and subject to interpretation, leading to potential complexities.

Factors such as the regularity and continuity of the activity, intent to make a profit, and the level of activity are considered by courts and the IRS to determine if an activity qualifies as a trade or business. While retail traders typically may not be categorized as a “trade or business,” challenges may arise for those engaging in frequent trading, running validator nodes, or participating in staking activities

In short, if you engaged in a crypto transaction that exceeded $10,000, walk through the facts and circ*mstances with your tax professional to determine if additional reporting is required.