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By: Rebecca K. Wohltman

With the growing popularity of crypto transactions and the ease of paying for almost anything with crypto, it’s important to understand how crypto transactions are taxed.

The IRS has taken the position that crypto is not currency. The IRS considers crypto to be property. Since, for tax purposes, crypto is property (and not currency), each time you pay for something with crypto you are essentially engaging in two transactions.

The first transaction is to convert the crypto to U.S. dollars. This is the step in the transaction that will generate a tax gain or loss that most people may not be expecting.

The second transaction is the payment for goods or services using crypto. The IRS views this payment as made with dollars (after the crypto was converted into dollars). This transaction may or may not have a tax effect, depending on the transaction itself.

An Example of a Crypto Transaction

An example might help clarify this tax treatment. Say you want to go to a restaurant in downtown Belleville, IL for lunch and you want to pay for that $20 lunch with your crypto. Say you purchased the crypto with $10 of U.S. dollars and it’s now worth $20.

The tax treatment of this lunch is as follows:

  1. You exchange the $20 worth of crypto for $20 U.S. dollars. Since you purchased the crypto for $10 and sold it for $20, you have a $10 gain. You will pay tax on this $10 of gain.
  2. You pay $20 for lunch (likely not a taxable transaction).

If you pay for lunch with $20 of U.S. dollars, this Belleville, IL lunch would not have generated a taxable transaction. However, since you paid for lunch with crypto, you now have a taxable component to your lunch.

A transaction with crypto is taxed the same way as if you sold stock from your investment portfolio and used the cash from that stock sale to complete the transaction.

While this is a simplistic example, many people do not realize paying for products or services with crypto comes with these tax implications. It is important to keep track of all of your crypto transactions so you can properly report your gains and losses on your tax return.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.