Cryptocurrencies are treated as property for tax purposes by the IRS.(1) Tax rates on gains and losses on cryptocurrencies depends on the tax bracket the holder of the cryptocurrency falls under, and whether the cryptocurrency was held for short-term or long-term. Simply holding cryptocurrencies is not a taxable event. A cryptocurrency investor will only be liable to pay taxes are when their cryptocurrencies are: i. traded against fiat or other cryptocurrencies, ii. used to pay for goods or services, iii. received as compensation or income. The purchase, transfer or gifting of cryptocurrencies are not taxable events.(2) The complexities of tax codes in the U.S. extends to cryptocurrencies and some have criticized the IRS for deterring the adoption of cryptocurrencies.(3)
Filing taxes on gain on cryptocurrencies is a cumbersome process, especially for day traders who executes several trades across various cryptocurrency pairs each day. In the recent years, new cryptocurrency tax software such as TokenTax, BearTax and CryptoTrader.Tax have been made available to aid cryptocurrency investors in preparing their tax returns. An increasing number of crypto exchanges are also adding features where users can export their trade history for tax purposes, which, if supported by the cryptocurrency tax software, can be then be uploaded for automatic tax calculations. When in doubt, it is strongly suggested the investors seek opinions from experienced tax accountants.
Alternatively, investor who do not want to deal with filing taxes on cryptocurrencies can invest through crypto hedge funds or asset managers, which may offer automatic tax preparation services. For instance, Bitwise Asset Management sends out a simple Schedule K-1 to their investors during tax seasons for their convenience.(4) Pantera Capital, a crypto hedge fund, also offers K-1 reporting.(5)