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Blog 30, Oct

Tax Rules for Buying and Selling Crypto

It wasn’t long ago that virtual currency such as Bitcoin was considered a niche investment, but things have changed dramatically in recent years. Today, cryptocurrency transactions are common and investors at every level are using cryptocurrencies as a medium of exchange for goods and services. If you have obtained digital currency through crypto mining, you should be thinking about the tax consequences of doing so. At CMP, a crypto tax CPA, our experienced team of tax pros has created this guide to help you understand crypto mining taxes, including how to report cryptocurrency income on your tax returns and minimize your taxes. Tax Implications of Cryptocurrency Mining The tax implications of cryptocurrency mining are complex and may be confusing to people who are new to mining. Let's start with the basics. You must report both cryptocurrency holdings and any cryptocurrency you earn to the IRS. Gains you make by buying cryptocurrency or mining it is all considered to be taxable, although the specific rules of how they are taxed vary depending on how they came into your possession. The cryptocurrency that you earn through mining is reported and taxed differently than the cryptocurrency you purchase as an investment. How is Cryptocurrency Taxed? Taxation of cryptocurrency is determined by how you obtained the crypto, and in some cases, how long you have owned it. The rules differ depending on whether you bought the cryptocurrency in question or obtained it through mining. Cryptocurrency holdings are considered to be property and not income. In general, the money you earn as your holdings increase in value is a taxable capital gains when sold. The money you lose is a capital loss and is reported as such. Holdings are taxed as short-term capital gains if you have owned them for less than a year and as long-term capital gains if you have owned them for longer than a year. The same rule does not apply to cryptocurrency mining. Hobby miners and business miners must report their earnings from mining as income. Any Bitcoin or other cryptocurrency that you earn for your work mining may be reported to the IRS on Form 1099-NEC by the payer or mining pool. The person who mined the crypto then reports this amount as business income, even if the payment is made in-kind rather than as a cash payment. Crypto Miners IRS Reporting Rule for Transfers There has been an ongoing debate about whether crypto miners should be subject to IRS reporting rules that require crypto brokers to report their clients' crypto transactions to the IRS. As of February 2022, this issue seems to have been resolved to the benefit of crypto miners, crypto-stakers, and ancillary participants in the crypto market. It has been determined that the reporting rule applies only to crypto brokers and was never meant to capture the work done by crypto miners. The reason is that crypto miners are usually not in a position to identify whether a transaction is a sale and do not have access to the personal information that would be required for proper reportage..