Blockchain and Cryptocurrency, Investing

The Potential Tax Bomb For Crypto And Digital Asset Investors

I consider it my responsibility to bring potential financial bombs to your attention…

As the NFT market continues to excite investors, NBA Top Shots show no sign of slowing down, I can only expect that investors who have seen huge gains in their cryptocurrency positions will continue to bid up the digital asset market.

In doing so, I’m concerned many will be in for a big surprise next year when filing their 2021 taxes—I could be wrong, but I have a feeling many investors do not realize when they exchange their cryptocurrency for an NFT or other digital asset it is a taxable event.

Tons of investors have experienced substantial gains in ether and bitcoin over the last year and many of those gains are being shifted into digital assets—if you find yourself in this camp, please just be aware of the potential tax liability you will have and plan for it in advance.

It may not feel like a “sale” has occurred—after all the investor did not sell her ETH, receive cash, and then make her purchase, which is what would normally happen if she was selling some of an ETF to make a purchase. Instead, the growth in the cryptocurrency is shifted to the purchased digital asset—but the IRS recognizes that as a taxable event. This means a capital gain has been experienced (assuming there is a gain), will be reported, and will generate a 1099.

This taxable scenario will only become more common as companies begin to accept cryptocurrency, which we are already starting to see.

You can now purchase a Tesla with BTC  and today Paypal is set to announce the ability to use cryptocurrency at check out. As my friend Tyrone Ross suggests, you will now have the ability to create capital gains taxes with every purchase and more importantly questions whether or not you should be spending your cryptocurrency on every day purchases?!?

That’s a different convo for a different day–just remember the guy who bought a pizza with BTC years ago.

Without planning, crypto and digital asset investors could be in for a big surprise–don’t let that be you!

Here’s a great article from CNBC.com that explains the taxation of not only using cryptocurrency to purchase digital and other assets but the flipping of digital assets. 

 

Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.