Thursday, September 9, 2021

Do you pay taxes to IRS for all cryptocurrency transactions?

The title says it all. As far as I can tell, the answer is not clear cut. I've seen people give different answers in different places. In particular, here are some use cases. Which of these generate "taxable events"?

  1. I buy X in bitcoin and sell.
  2. I buy X in bitcoin but never sell.
  3. I buy X in some random coin and hold/sell.
  4. I mint some bitcoin.
  5. I stake some random coin (like Solara).
  6. I buy X in some random coin, and then use it to buy goods or services
  7. I buy X in some random coin, and then use it to buy another coin.

1. I buy X in bitcoin and sell

2. I buy X in bitcoin but never sell

As far as I can tell bitcoin buying/selling works just like the stock market. That is, in (2) there is no taxable event, so no taxes are owed. In (1), the taxes owed depends on whether or not you sold at a loss or profit. Furthermore, losses can be used to offset gains.

3. I buy X in some random coin and hold/sell.

It seems that buying/selling random coins works like bitcoin? The reason is because as per this IRS page, it talks about "virtual currencies" (and not just bitcoin).

4. I mint some bitcoin

Someone mentioned that this is analogous to mining physical gold, where you do not pay taxes until you sell the gold (or use it to purchase goods or services). This is actually false. Doh :-) Finding physical gold is a taxable event.

This IRS form specifically says that mining virtual currency is a taxable event.

5. I stake some random coin (like Solara)

The analogous case is that you invest X dollars in a savings account. You pay taxes on the interest.

I would seem to think that you owe taxes on any earned coin. But it's not really clear.

6. I buy X in some random coin, and then use it to buy goods or services

As far as I can tell, this IRS form, says that it is a taxable event. But...

  • if the coin drops in value (from what you paid for), then it's a capital loss. (So taxes wouldn't be owed and you could use those losses to offset other gains).

7. I buy X in some random coin, and then use it to buy another coin.

As far as I can tell, this IRS form, says that it's Case 6.

But that's bat-shit crazy!

I'm mean you're potentially paying taxes twice here---once for the sale of the original coin, and then again when you sell the other coin!

Notes

Something doesn't seem right here. For instance, in certain cases, it feels like you're taxed twice. For example, you mint some coin. Boom. Taxable event. That coin goes up in value and you pay your mortgage with it. Another taxable event.


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