Capital Gains Tax (CGT)

The IRS treats cryptocurrency as property for federal tax purposes. Therefore general tax principles that are applicable to property transactions must be applied to crypto transactions.

When you dispose of a cryptocurrency that was held as a capital asset (by selling, trading, or paying for a service or item) you are subject to capital gains or losses.

Some of these dispositions include:

• Selling cryptocurrency for a fiat currency (USD, GBP, EUR, etc.)

• Purchasing goods or services with cryptocurrency

• Exchanging one cryptocurrency for another (BTC to ETH, ETH to DOGE, DOGE to SHIB, etc.)

A good rule of thumb is that if cryptocurrency is leaving your possession, it likely is a capital event and you will experience a capital gain or loss.

If purchased crypto increases in value, profits generated from its disposal are treated as a capital gain; if it decreases, the loss on disposal can be deducted against other capital gains including non-cryptocurrency capital gains.

Sales Proceeds – Cost basis = Gain or Loss

Depending upon how long you held the cryptocurrency before disposition, you may be subject to a different tax rate. Cryptocurrency held for less than a year when disposed of is considered a short term gain or loss, and is taxed as ordinary income under US law. Cryptocurrency held for over a year when it is disposed of is considered a long term capital gain or loss, and is typically taxed at a lower rate than ordinary income.

Capital gains and losses are reported on IRS Form 8949: Sales and other Dispositions of Capital Assets. This form will list:

• Description and volume of the cryptocurrency

• The date you acquired the cryptocurrency

• The date you sold or otherwise disposed of the cryptocurrency

• The proceeds (or loss) from the disposition

• The cost basis of the cryptocurrency (usually this is the cost of the cryptocurrency when it was purchased)

• The capital gain or loss from disposing of the cryptocurrency

Capital gains seem simple to establish, but for those who trade often, it can be tedious and time-consuming – this is where Recap can help. Users connect their exchange accounts or upload CSV data to the app. Once all the user’s data has been collected in the app, they can generate a tax report for the desired tax year.

In-depth guidance on Capital Gains Tax:

Capital Gains Tax