You should already know the answer to this question, if for no other reason than this would be a very short article if the answer was “no”.
Of course, the answer is “yes”. Just like all other property (and yes, crypto currency is property), it is subject to state and local taxes if you realize a gain on the property. Good news is, it’s a capital asset – meaning that gains are subject to the favorable capital gains rates. Bad news is the gain can sneak up on you if you’re not paying attention.
The reason for this is because of how many of us view crypto currency. We don’t often think of it like we do more traditional investments (i.e., stock). Much of this is because you generally can’t use pieces of your stock portfolio to buy things online. Whereas that’s exactly what you can do with crypto. Additionally, if you have some complexity with your basis, you could have a real tax issue. Let’s walk through a scenario.
Say, five years ago you dipped your toe in the water and bought some Bitcoin for the novelty. You don’t do anything halfway though, so you go in at $5,000. Then at Christmas, a family member knows that you’re now into crypto, so they gift you a little bit. A couple of years go by, and you get a little more – say another $10,000. You kind of forget about it until you start seeing headline after headline, and you realize that your $15,000 investment is now worth $75,000. You just put up with a pandemic and endured a tumultuous past two years, so you start googling how you can use your Bitcoin to buy that Tesla you’ve always wanted. I mean after all, you’re only spending $15,000, right? So, you do it – you click the button, you turn over all your Bitcoin in exchange for your new Tesla.
Unfortunately, now you have a tax problem. Keep in mind that tax problems aren’t always a problem. I mean after all; you just bought a Tesla for $15,000 – but you are going to owe some tax. What you did here was no different than if you sold some stock you’ve been holding for years, and then took the cash and bought something. Your $60,000 gain is subject to tax. Crypto makes it a bit more complicated since you have to go back and look at which Bitcoin you used though. Did you use the piece that you paid $5,000 for, or the piece that you paid $15,000 for? Did you use the piece that was gifted to you? How does that work? In our scenario here, you used all your crypto. But for scenarios where you don’t, you’ll have to do this.
Bottom line is you have to figure all of this out. If you use crypto that you held for more than a year, your max rate on your capital gain is 20% (plus state and net investment income tax). If you use crypto that you held for less than a year, you’re subject to ordinary income tax rates.
To get ahead of the game, make sure you’re tracking your crypto purchases when you purchase them – date and amount paid. If you use it to buy something, make sure you identify which crypto you used, and track the date sold and the amount you purchased with them.
If you have questions about any of the information outlined above, McKonly & Asbury’s experienced professionals are here to help. Please contact us or visit our website to find out more about our Tax Services.