CRYPTOCURRENCY

Cryptocurrency transactions can be taxed as an investment or as earned income.

An Investment

Just like a stock that you purchase and then sell, short-term or long term capital gains apply but subtracting the cost basis from the sales price (fair market value).

• Cost Basis

Your cost basis is the amount you spent to purchase including fees and commissions

• Fair Market Value

The IRS will accept as evidence of fair market value the value as determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time.

Earned Income

Exchange for Products or Services.

If you receive cryptocurrency for services, it is income to you for the fair market value at the time it was received.

• If you kept the cryptocurrency, it is now an investment. The fair market value at the time of receipt is your cost basis. When you sell or exchange it, you will need to calculate capital gains.

Cryptocurrency "Mining" and "Hard Fork Airdrop"

When crypto currency is created (mined) or it is received via airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received.

Gifted Cryptocurrency Cost Basis

The cost basis is equal to the LESSER of:

• the donor’s basis, plus any gift tax the donor paid on the gift OR

• the fair market value of the virtual currency at the time of receipt.

However, if you do NOT have documentation to substantiate the donor's basis, the basis is ZERO.

This means that it is incredibly important to save the documentation of the purchase and capture the value at the time of receipt.

Nontaxable Transfers of Cryptocurrency

As long as the transfer occurs between a wallet with an address, or account belonging to you, to another wallet, address, or account that also belongs to you, there is not a taxable event.