Taxes - Valkyrie

Taxes

Key takeaways

  • Any time you sell, spend, or exchange cryptocurrencies or NFTs, you are creating a taxable event
  • Crypto assets held for less than twelve months are taxed at short-term gains rates while assets held longer than twelve months are taxed at long-term gains rates
  • Staking yields and mining rewards are taxable at the date and price received. A second taxable event is created when those rewards are sold, with the taxable amount as the difference between the sales price and the basis as of the date received

Cryptocurrency prices experience substantial volatility. At times, bitcoin and ether experience over 100% annualized price volatility or four times the average volatility of a stock market index. The significant volatility and taxable nature of cryptocurrencies make them impractical for everyday spending like a fiat currency. In the US, digital assets are taxable, with short-term gains taxes applied to positions held less than twelve months and long-term gains taxes applied to positions held over twelve months. Transactions are taxable when digital assets are sold or converted into another digital asset. Taxes can be reduced when an investor realizes losses in the same year as gains, as realized losses can reduce taxable gains. A consumer using cryptocurrency to buy groceries and gas on a regular basis might have hundreds of taxable transactions each year, with each transaction needing to be accounted for at tax time.

Rather than selling their digital assets, some investors will take a loan against their value. This can defer taxes and allow investors to participate in further upside gains.

Unlike stocks, there is currently no wash sale rule in cryptocurrency. In stocks, once a loss is realized for tax purposes, the investor must not repurchase the same asset or a substantially similar asset for 30 days. If the asset is repurchased within 30 days, a wash sale is declared and the original loss can no longer be used to offset taxable gains. In cryptocurrencies, investors have the option to realize a loss and repurchase the sold asset at any time without restriction.

Staking yields and mining rewards are taxable at the date and price received. A second taxable event is created when those rewards are sold, with the taxable amount as the difference between the sales price and the basis as of the date received.