Do You Pay Tax on Crypto
The IRS, so far, is not recognizing cryptocurrency or crypto as a true currency. They consider crypto to be property and any gains or losses are reported in the same manner on Schedule D and Form 8949 where applicable.
How Is Cryptocurrency Taxed
Any purchase, sale, or trade of cryptocurrency in a non-retirement account is subject to capital gains or losses. These gains or losses will be categorized as either short-term or long-term just like any other investment.
If you own the crypto for a year or less before selling or spending it any profit will be considered short-term and will therefore be taxed at your ordinary income rate.
If you own it for more than one year, any gain will be deemed long-term and subject to long-term capital gains tax rates.
Crypto Mining is the act of solving cryptographic hash functions in order to validate and add transactions to the blockchain.
If you earn crypto by mining, it is considered taxable income and might be reported on Form 1099-NEC at the fair market value on the day that you received it. This must be reported as income even if you do not receive a 1099.
Crypto Received as Payment for Goods Or Services
Any crypto received in consideration for goods or services the crypto received is considered taxable income just as if they paid in cash, check, or credit card. It will be taxed at fair market value on the day and time of receipt.
Selling or Spending Crypto
Regardless of if you mined, bought, or received cryptocurrency when you eventually sell or spend it, it then becomes a capital transaction resulting in a capital gain or loss just like selling a share of stock, and must be reported on your tax return.
The exchange of one crypto for another is also considered a capital transaction resulting in either a gain or loss. So if you buy $100 of Ethereum today and later today, tomorrow, or in 10 years decide to exchange it for $500 of Bitcoin there would be a capital gain of $400. The same is also true in reverse if your original purchase was for $500 of Ethereum and you exchanged the full value of it for $100 of Bitcoin you would then have a capital loss of $400.
Just like crypto mining, gains from staking your crypto would be treated as taxable income at the day and time it was received.