Trading crypto? Using it in transactions? Are you mining or staking? Your crypto is taxable

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Digital earnings, but taxes are owed in dollars.

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Do you own—or have you transacted in—crypto assets? Engaging in any cryptocurrency or digital asset transaction can trigger tax consequences—and nobody likes nasty surprises from the IRS. The type of transaction and whether you incur a gain or loss are two major factors that help determine your crypto tax bill.

Whether you’re an occasional crypto-dabbler, an active trader, miner, or anything in between, here’s what you need to know about cryptocurrency and taxes.

The Internal Revenue Service (IRS) classifies cryptocurrency as property, treating it like other investment assets such as real estate, stocks, and fine art. The core tenets of taxation that apply to property generally apply to digital assets, too.

Treating cryptocurrency as property may seem counterintuitive, given that it’s both virtual and used as a medium of exchange. But if you’re an investor or trader seeking exposure to digital assets, you need to understand the tax implications. Several transaction types can create capital gains or losses, all of which need to be reported at tax time.

Understanding crypto tax rules shouldn’t feel like deciphering ancient hieroglyphics. Let’s dig into what to expect for five common crypto transactions.

Buying and holding cryptocurrency or another digital asset does not create a taxable event. Simply purchasing cryptocurrency is a lot like buying a piece of art and hanging it on your wall—at least for tax purposes.

But it’s important to keep track of your cost basis—what you paid for the tokens, including fees. You need to know the cost basis of all cryptocurrency purchases in your portfolio to accurately determine your tax bill.

If you buy and sell on a crypto exchange, the platform will often track your basis as a service to you as an account holder. But that’s only accurate for transactions within the platform. If you buy and sell on multiple exchanges, you’ll probably need to track your basis manually.

Selling cryptocurrency triggers a taxable event. Your tax liability is determined by several factors:

Another way to incur tax liability is by swapping out your digital assets. A crypto trade is divided into two parts—a sale and a purchase. If you sell Bitcoin to buy Ethereum, for example, then the IRS considers the two transactions separately.

Each transaction is treated like any other crypto sale or crypto purchase. Your profit from the sale generally determines your tax liability, and the purchase price sets the cost basis for the new tokens you acquire, in a manner similar to the buying and selling of property.

Cryptocurrency holders can spend their tokens with merchants that choose to accept crypto. But the IRS views spending your crypto as selling it. That’s because the government deals in dollars and cents, so it considers your transaction as an exchange of your crypto for dollars—much like a foreign exchange transaction—followed by a transaction with the merchant at the dollar-equivalent value.

You’ll need to record the cost basis (purchase price) of the cryptocurrency at the time that you acquire it, and then note the value of your purchase when you spend it. The difference between the cost basis and value of the purchase is your capital loss or gain.

Whenever you buy something with cryptocurrency, it generally means you need to report the transaction at tax time. This reporting obligation can make cryptocurrency less useful for everyday purchases.

You can be paid in cryptocurrency, whether it’s from cryptocurrency mining or staking, or via another profession. Any company can choose to pay their employees in cryptocurrency.

In each case, the cryptocurrency you receive is treated as ordinary income. The market price of the cryptocurrency on the day you receive it determines its value, your cost basis, and your income tax exposure.

In order to accurately report your cryptocurrency transactions at tax time, you’ll need to keep thorough records and precisely calculate your capital gains and losses. The sometimes decentralized nature of cryptocurrency transactions and the high volatility of cryptocurrency prices can make crypto taxes especially complicated.

Here are some of the primary challenges:

Understanding crypto taxes is crucial for crypto investors—but that doesn’t mean you need to become an amateur accountant simply to add crypto to your portfolio. Understanding the fundamental principles of cryptocurrency taxation is a major leap in the right direction. Just remember to keep complete and accurate records, or get reliable help with your recordkeeping.

This article is intended for educational purposes only. Encyclopædia Britannica, Inc., does not provide legal, tax, or investment advice.