The IRS began taxing cryptocurrency in 2014 with IRS Notice 2014-21. This landmark notice classified virtual currencies like Bitcoin as property for federal tax purposes. As a result, general tax principles applicable to property transactions now apply to cryptocurrency transactions.
Key Points
- IRS Notice 2014-21 (2014): The IRS declared that virtual currencies are treated as property, not currency, leading to capital gains tax implications.
Taxable Events Include:
- Selling cryptocurrency for fiat money (e.g., USD).
- Trading one cryptocurrency for another (e.g., Bitcoin for Ethereum).
- Using cryptocurrency to purchase goods or services.
- Receiving cryptocurrency as payment for services or goods.
- Mining or staking rewards received in cryptocurrency.
Capital Gains and Losses: Profits or losses from cryptocurrency transactions must be reported on your tax return, similar to stocks or real estate investments.
Key Dates in U.S. Cryptocurrency Taxation
| Year | IRS Action |
| 2014 | IRS Notice 2014-21: Classified cryptocurrencies as property for tax purposes. |
| 2019 | Revenue Ruling 2019-24: Provided guidance on the tax treatment of hard forks and airdrops. |
| 2020 | Form 1040 Update: Added a question about virtual currency transactions to Form 1040. |
| 2021 | Increased Enforcement: Heightened scrutiny on crypto transactions; IRS began sending warning letters to taxpayers. |
Frequently Asked Questions
Do I need to pay taxes on cryptocurrency transactions?
Yes, report all taxable crypto transactions, including sales and trades.
How is cryptocurrency taxed?
It is taxed as property, with capital gains taxes applied.
What if I don’t report my cryptocurrency transactions?
Penalties and legal actions may result from non-compliance.
Are crypto-to-crypto trades taxable?
Yes, they are considered taxable events.
Do I owe taxes if I receive cryptocurrency as payment?
Yes, it is treated as income and must be reported.
Are small transactions exempt from reporting?
No, all taxable events must be reported, regardless of the amount.
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