Paying Taxes on Crypto Earned as Income

On: April 10, 2020

Crypto has been around for a decade, but many new adopters are still uncertain about properly filing and paying taxes on crypto earned as income. If you work for a business that pays wages or bonuses in crypto, there’s a good chance it’s a crypto business, and you’re an early adopter who’s been paying close attention to developments in crypto tax policy. Though you may still have some questions. But if you’re one of the many small businesses with a strong online presence that has started to accept crypto payments to ship goods or services, you may be confused about paying taxes on crypto earned as income from business revenue.

Paying Income Tax on Crypto Earned As Income

It’s important to report crypto earned as income to the IRS and to file it correctly with your taxes. This may be a small burden, but it is on you to keep track of your crypto transactions and file earnings correctly. While brokerage companies and investment banks will send you a 1099 for your stock and bond activity, in the new frontier of crypto, you have to keep your own books. This year there may be more cryptocurrency transactions filed on income tax returns than in any previous year since bitcoin arrived on the scene a decade ago. There isn’t any special crypto tax rate for income earned in the form of cryptocurrency as wages or payment for goods or services. It’s simply reported to the IRS as income and taxed at your applicable federal personal or business income tax rate for the year.

Capital Gains Tax on The Sale of Crypto Earned As Income

After a long crypto price “winter” spanning all of 2018, bitcoin and the price of most major altcoins surged mid-2019, but declined just as dramatically in the third and fourth quarters as investors cashed out for profits. They’ll owe taxes on any capital gains. The IRS views cryptocurrencies as digital assets– in other words as property, not as currencies. So paying taxes on crypto earned as income involves a second step when an individual or business sells the crypto they earned, or spends it to buy other goods or services. At that time they may trigger another taxable event, if the crypto increased in market value from the time it was earned as individual or business income. Then crypto owners are responsible for calculating capital gains from the cost basis, the value of the crypto at the time it was received. Meticulous record-keeping is necessary to prove to the IRS that you have made a good faith effort to report crypto income thoroughly and accurately. Crypto prices are volatile and can swing wildly within a 24 hour period. It’s advisable to keep a record of the crypto’s price at the exact time of the transaction, which can be found using a number of free services such as TradingView. Or if you use the day’s high price as the cost basis for purchases, you should also use it for sales. To keep your reporting consistent and keep it from getting too confusing, you could also use the First In, First Out accounting principle or the Last In, First Out principle to determine which income transactions to use as the cost basis for which settlements of crypto for cash or other goods or services. Just be sure to stick with one accounting method to keep it consistent.