Taxes are a topic most people don’t like thinking about or discussing; however, it is wise to be aware of the tax implications if you are dealing with cryptocurrencies or other digital assets.
How Cryptocurrencies Are Taxed
Cryptocurrencies are assets and as such are considered to be property for tax purposes. Therefore upon their sale or exchange, a capital gain or loss is recognized and tax assessed as such. Every person using a crypto exchange will receive a Form 1099B (a copy of which is also sent to the IRS) which details the purchases and sales of crypto within your account.
The cost basis of a cryptocurrency is equal to the cost of the crypto plus gas and exchange commission fees. NFTs are treated in the same way as cryptocurrencies under current tax law.
Airdrops & Staking Income
Cryptocurrency or NFTs received as an airdrop or income from staking is considered to be ordinary income and not a capital asset; therefore, these are taxed as earned income.
NFTs Received as Rewards
Any NFT that is rewarded to a buyer/investor is considered to be ordinary earned income and will be taxed as such. All income received by the creators of any NFT is considered ordinary income and any royalties received by creators are also considered to be ordinary income.
Transferring/swapping from one coin to another
Transferring cryptocurrency from one account to another is NOT taxable. Swapping one crypto for another is also NOT taxable.
The accounting community and the taxing authorities at the Federal and State/Local level are all grappling with how to treat Web3 assets and blockchain smart contracts. The best advice is that you should keep very good records of all of your transactions and be consistent, reasonable, practical, and honest about your tax reporting.