Did You Buy Ethereum Last Year? Here Are 3 Questions You Might Want to Ask Your Tax Pro

It has been a fruitful year for the cryptocurrency market. Many cryptocurrencies have seen returns. The price swings can be dramatic, sometimes in one day, and the time between dips is getting smaller. Current affairs keep meddling with the crypto movement, affecting your trading/investing behavior. 

Investors are keenly aware that they may be subject to capital gains taxes if they buy or sell any cryptocurrency on a taxable exchange. But what about transactions made elsewhere? Here are three questions related to tax reporting obligations in the United States if you bought Ethereum (or other cryptocurrencies) last year.

1. For the purposes of IRS Form 1040, which is used to report taxes in the United States and many other countries, what counts as a taxable exchange?

It is important to note that cryptocurrency transactions made outside of a taxable exchange are not necessarily completely free from tax obligations. This is especially true in the United States, where capital gains tax must be paid on crypto-to-crypto transactions.

2. What is a taxable exchange?

Form 1040’s definition of “exchange” can be found at the bottom of the form under “Supplementary Instructions.” Form 1040 uses two examples: (1) the purchase of an asset where you receive cash in return, or (2) the sale of an asset where you pay cash to acquire an asset.

3. Is cryptocurrency a “security”?

Security is a broad category in the United States that includes assets such as stocks, bonds, commodities, and options. The IRS notes that the definition generally applies to “any investment contract…if title to the security can be transferred (regardless of whether or not any market exists).” 

Security is not limited to a specific type of instrument and therefore depends on an investor’s interpretation of their purchase. If you consider it an investment contract, then it probably is security for tax purposes.

Wrap up

Here you go – some essential questions to ask your tax pro. 

Bear in mind that the tax treatment of cryptocurrency is a gray area and continues to evolve. The best way to protect yourself from potential tax obligations is to consult a professional. If you are looking for more information, stay tuned for future updates from us.

We will be giving more tips, tricks, and general information that could help you fully navigate the world of Ethereum!

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