Cryptocurrencies

Selling, exchanging, or using cryptocurrency triggers capital gains and losses for traders.

Selling, exchanging, or using cryptocurrency triggers capital gains and losses for traders. The IRS treats cryptocurrencies as intangible property.

The realization method applies to short-term vs. long-term capital gains and losses. Traders investing in cryptocurrencies and selling, exchanging, or spending some during the year must report a capital gain or loss on each transaction. Tax reporting includes cryptocurrency-to-fiat-currency sales, crypto-to-alt-crypto trades, and purchases of goods or services using crypto.

Some U.S. cryptocurrency exchanges issue a Form 1099-K to accounts with transactions over a certain threshold. Others give a 1099-MISC or 1099-B. The problem for the IRS is that many cryptocurrency transactions on exchanges worldwide need to be evident for tax reporting. Cryptocurrency investors should download all crypto transactions into an IRS-compliant crypto accounting program.

Wash sales do not apply to intangible property. Section 475 MTM does not apply to cryptocurrency because it’s not a security or a commodity in the eyes of the IRS. 

In most cases, crypto traders use the first-in-first-out (FIFO) accounting method. For transactions in intangible property, an investor should use the “specific identification method” that requires some special procedures. Few traders meet those requirements, so they use FIFO. See FIFO vs. Specific Identification in Chapter 4.

TCJA restricted Section 1031 like-kind exchanges to real property starting in 2018. That rules out using like-kind exchange on crypto-to-crypto trades (i.e., Bitcoin for Ethereum). Whether crypto traders could have used Section 1031 before 2018 to defer capital gains taxes is questionable. The IRS mailed tax “education” notices to thousands of crypto traders and released new FAQs about hard forks, airdrops, and other open questions. See the IRS page: Frequently Asked Questions on Virtual Currency Transactions (https://tinyurl.com/virtual-currency). 

For more information, see Green’sTraderTax Guide Chapter 3 Tax Treatment of Financial Products.

  • Capital Loss Carryovers
  • Securities
  • Section 1256 Contracts
  • Options
  • Exchange-Traded Funds (ETFs)
  • Forex
  • Cryptocurrencies
  • Other Financial Products
  • Short Selling
  • Capital Loss Carryovers
  • Securities
  • Section 1256 Contracts
  • Options
  • Exchange-Traded Funds (ETFs)
  • Forex
  • Cryptocurrencies
  • Other Financial Products
  • Short Selling
    • Accounting Services When it comes to accounting, securities and cryptocurrency traders face several challenges. Incorrect accounting can throw off your entire tax return, so it's imperative to have your ducks in a row.
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