Even though Bitcoin, the first cryptocurrency, launched in 2009, business owners still struggle to understand what gets taxed when, and what constitutes a taxable event with cryptocurrency. In this article, we’ll discuss whether you get taxed for converting crypto and other crypto-related tax questions for businesses.
Background on Crypto Taxes
NOTE: Cryptocurrency tax rules are always changing. While we strive for accuracy, this article is not official financial or tax advice. Be sure to consult a tax professional who has expertise in cryptocurrency regulations and how you get taxed for converting crypto.
For the first several years, Bitcoin’s technology was so misunderstood, few people even considered whether taxes should play a part in the cryptocurrency discussion. As new cryptocurrencies entered the scene, the whole industry grew in popularity and maturity. Over that time, different use cases became more apparent.
This created new challenges because different cryptocurrencies served different purposes: some were categorized as an actual digital currency, others as a utility, and still others as a commodity. Regardless, it was clear that the US government would start taxing the use of crypto—as soon as it could determine how to do so.
How Do I Pay Taxes for Crypto I Earn as a Business?
Business income in crypto is taxed like cash income. Consult your tax advisor about specific filing requirements.
Is Converting Crypto a Taxable Event?
Yes. Ultimately, the US determined that investing in cryptocurrencies should be treated as a commodity for tax purposes. This means that buying crypto isn’t taxable, but any time you sell cryptocurrency it is a taxable event. It doesn’t matter if you are converting a seemingly insignificant amount of crypto as a business or converting large amounts of crypto all at once: You must keep track of every trade.
When Do You Get Taxed for Converting Crypto?
When customers pay in cryptocurrency, it is treated the same as cash for income tax. When you convert that crypto into another cryptocurrency or into fiat (USD) you are charged a capital gains tax.
Example:
Initial Investment:
- Purchase $100 at BTC price of $50,000
- Amount of BTC owned: $100/$50,000 = 0.002 BTC
Sale:
- BTC price at sale is $60,000
- Value of 0.002 BTC = 0.002 x $60,000 = $120
Capital Gains:
- Sale price: $120
- Cost basis (or purchase price): $100
- Taxable profit: $120-$100 = $20
Using crypto to pay business expenses counts as a sale of an investment and triggers capital gains tax too, since you’re converting cryptocurrency into goods or services.
Hint: If your eCommerce cryptocurrency platform automatically converts payments to fiat or a stablecoin pegged to the US dollar, you’ll still need to report these conversions, though capital gains will be minimal.
What Is the Difference Between Short-Term and Long-Term Capital Gains
A capital gains tax is owed on any asset treated as a property or investment when it is sold. But, there are also short-term and long-term capital gains:
- Short-term capital gains – applies to assets you held onto for one year or less
- Long-term capital gains – applies to assets that you held for more than one year
What Tax Rates Are Paid for Short-Term and Long-Term Capital Gains?
Short-term capital gains are taxed at your ordinary income rate, while long-term capital gains potentially qualify for lower rates. Talk to your crypto-friendly tax advisor for specific details.
What If I Bought an NFT?
NFTs, or non-fungible tokens, can mean different things. They are commonly associated with real estate investment trusts (REITs) and digital art in the form of cryptocurrency that is unique and one-of-a-kind. You treat these investments the same way as converting crypto. If you sell an NFT, you owe taxes on the profit, and if you sell it at a loss, this can be deducted.
What If I Lost Money?
Technically, if you sell any crypto for less than what you paid for it, you can deduct it as a loss.
Is There Anything Else I Can Deduct?
Yes. You can also deduct any fees you paid in conversions or additional trading fees. Any fees that you have to pay in buying, selling, or trading crypto can be deducted from your taxes.
Is Transferring Crypto a Taxable Event?
Transferring cryptocurrency is like depositing and withdrawing money to and from your bank account. Since it is simply about moving the crypto you have from one crypto wallet to another, you do not have to pay taxes when doing so. However, it is important to keep a record of where your money resides and notate whenever it is transferred, just like any proper bookkeeping.
Other Fees Involved in Converting Crypto
In addition to any taxes owed, there are other fees involved when converting cryptocurrency. You may pay a trading fee when you buy or sell crypto. You will typically also pay a withdrawal fee when sending your crypto from your account on an exchange or in a crypto eCommerce account/wallet. In some cases, you may pay a holding fee if you leave crypto sitting in an account for a long duration.
Using Crypto to Pay for Your Shipping
If you want to put some of your crypto earnings to use, paying for shipping is an excellent option. It’s fast, instant, and secure. Just be sure to track the crypto spent toward your expenses for your capital gains taxes at the end of the year.
You don’t have to share any personal financial data to pay for shipping with crypto, and it’s a great way to prove the value of one of crypto’s most important use cases: as a viable form of currency.
Try paying for your shipping with crypto using Bitcoin Postage today!
FAQs
What if I’m just converting Bitcoin to a stablecoin?
Stablecoins are cryptocurrencies that are pegged 1:1 to the price of fiat: typically the US dollar. Even if you are converting Bitcoin you bought over to a stablecoin like USDC, it is a taxable event.
Are there any situations where you don’t have to pay taxes for your crypto?
Yes. Buying and holding crypto doesn’t require any tax reporting. You also don’t pay taxes when you donate crypto to a non-profit or transfer it between two wallets you own.
When Do I Have to Report Taxes on Crypto?
When you buy, sell, convert, mine, and stake crypto it is a taxable event. It is also a taxable event when you are paid in crypto.