FAQs by Real Estate Investors About the Tax Treatment Cryptocurrency

I know what you’re thinking… “Aren’t you guys real estate CPAs? Why post about cryptocurrency?”

Well as you know real estate investors are first and foremost, investors.

And of course, many investors are dabbling in cryptocurrency these days and have a lot of tax related questions.

Thus here we are and in this article we will cover some of the most common questions we’re getting from clients and Tax Smart Investors.

Are cryptocurrencies taxed at capital gains rates like stocks?

The short answer to this question is yes, cryptocurrencies are taxed at capital gains tax rate.

The IRS considers cryptocurrencies “property” which is generally considered a capital asset, and capital assets are subject to the capital gains rates.

You’ll have a capital gain when your cost basis (i.e. the price you paid for the cryptocurrency) is lower than the sales price. If your cost basis is higher than the sales price, you’ll have a capital loss.

As with other capital assets, when you buy and sell the capital asset within a one year period, it is considered a short-term capital gain (STCG). STCGs are taxed at your ordinary income rates ranging from 10-37%.

When you hold a capital asset for longer than a year it is taxed at the long-term capital gains rates of 0%, 15%, or 20%.

In addition investors with modified adjusted gross income (MAGI) over $200,000 ($250,000 for married taxpayers) will be subject to an additional 3.8% Net Investment Income Tax (NIIT).

Does tax loss harvesting work with crypto?

As a quick refresher, capital losses can offset capital gains. Thus if you have a gain from a capital asset, it can be offset by a loss from a capital asset.

For example, if you had a capital gain of $7,000 from Bitcoin and a capital loss of $2,000 on Ethereum, they could net out and result in a net capital gain of only $5,000.

Tax loss harvesting is the act of selling capital assets in a loss position and using those losses against gains from other capital assets.

Now there is something called a wash sale that prohibit taxpayers from selling a stock or security and purchasing the same one within 30 days before or after the sale and recognizing a gain.

For example, you buy XYZ, Inc for $5,000 then sell it later for $4,000. You’ll have a capital loss of $1,000. However if you buy XYZ again within 30 days, you won’t be able to use the capital loss.

The good news is, at least currently, Section 1091 only applies to “stocks & securities” and IRS Notice 2014-21 treats cryptocurrency as “property” and not a security.

This means you could purchase Bitcoin for $50,000 sell it for $48,000, then immediately buy it back at $48,000 and still recognize a capital loss of $2,000.

That said, as crypto becomes more regulated, this loophole might eventually be closed.

If I buy crypto at multiple price points, how do I know my cost basis when I sell?

The most recent guidance by the IRS provides that crypto investors can use FIFO (first-in first-out) as well as specific identification methods such as LIFO (last-in first-out) or HIFO (highest-in first-out) for determining your cost basis.

Can you use rental losses (i.e. passive losses) against gains from the sale of cryptocurrency?

As you may know, passive losses can generally only offset income from passive activities. Passive activities include trades or businesses in which you don’t materially participate, as well as rental activities.

And to be clear, capital gains from the sale of cryptocurrency are not considered passive activities.

Thus, passive losses generally can’t offset the gains on the sale of cryptocurrency.

However, if you’re a real estate professional, then your rental losses are generally considered non-passive and at that point have the potential offset capital gains from non-passive activities.

Final Word

The cryptocurrency space is a rapidly evolving space and the current tax treatment of these currencies is likely to evolve along with it.

If you’re a big crypto trader or investor be sure to be on the lookout out to make sure you don’t face any unintended tax consequences!