What do you need to know about taxes if you use cryptocurrency to do business?

Cryptocurrencies & Taxes

Are you using cryptocurrency in your business? It's important to understand how cryptocurrency transactions can impact your taxes. While the world of digital currencies like Bitcoin, Ethereum, and others is rapidly evolving, so are the tax regulations surrounding their use.

1. Cryptocurrencies Are Taxable Assets

The IRS treats cryptocurrencies as property, not currency. This means that any time you sell, trade, or use cryptocurrency for goods or services, it could be a taxable event. Just like selling stocks or property, you may owe taxes on any gain or loss from the transaction.

2. Reporting Crypto Earnings

If your business receives cryptocurrency as payment, you are required to report the fair market value of the crypto in U.S. dollars at the time of the transaction. For example, if you receive 1 Bitcoin worth $25,000 for a service, you must report $25,000 as income.

3. Self-Employment Tax for Crypto Business Owners

If you’re a freelancer or sole proprietor accepting cryptocurrency, you’re likely subject to self-employment taxes. This includes both Social Security and Medicare taxes on your earnings.

4. Capital Gains Tax on Crypto Transactions

If you hold cryptocurrency as an investment and sell it for a profit, you'll need to report it as capital gains. If you’ve held the crypto for more than a year, it will be taxed at long-term capital gains rates, which are typically lower than short-term rates.

5. Tax Deductions for Crypto Expenses

You can deduct legitimate business expenses that you pay with cryptocurrency. For example, if you use cryptocurrency to pay for services or products, those expenses may be deductible, just like any other payment method. Be sure to track the value of the cryptocurrency at the time of the transaction.

6. Record-Keeping Is Crucial

Proper documentation is vital when it comes to cryptocurrency. Keep track of all transactions, including the date, value, and the nature of the transaction (whether it was income, an expense, a trade, etc.). Accurate record-keeping ensures you report your taxes correctly and can defend your claims in case of an audit. Consulting a tax attorney can also help ensure that you are complying with tax laws and properly documenting your transactions to avoid potential issues down the road.

7. Different Tax Rules for Mining Crypto

If your business involves mining cryptocurrency, the rewards you receive are considered income. This is taxable as soon as you receive the crypto. Additionally, any expenses related to the mining operation, such as electricity and equipment, may be deductible.

Ready to Navigate Crypto Taxes? If you’re using cryptocurrency in your business or planning to, it’s crucial to understand the tax implications. Call today at 941-906-7585 to schedule a consultation. Let us help you stay on top of your crypto tax responsibilities!