As we enter tax filing season, many cryptocurrency holders are wondering whether they are required to pay taxes when they spend their crypto holdings. Many taxpayers may be surprised to learn that taxes may be payable when they spend their crypto – even if they don’t convert it into fiat currency first.
Do I have to pay Capital Gains Tax (CGT) if I buy something with crypto?
According to IRS guidance on Virtual Currency Transactions, spending your cryptocurrency is considered a deemed sale of your crypto – the same as if you converted it back into fiat currency – and will trigger a capital gain/loss tax event. This means that you need to calculate your capital gain/loss based on the difference between the Fair Market Value (FMV) of your crypto at the time of purchase and your basis in the crypto.
If the FMV of your crypto at the time of the deemed sale is higher than your basis, the difference will be considered a capital gain for CGT purposes. However, if the FMV of your crypto at the time of the transaction is less than your basis, the difference may be used as a capital loss and may be used to offset tax liability for other capital gains.
Do I have to pay sales taxes when I buy something with crypto?
At the time of writing, the rules are the same whether you make your purchase using fiat or cryptocurrency.
Most states in the U.S. charge a sales tax on purchases, but this varies by jurisdiction, what is being purchased (e.g. goods or services), any applicable tax exemption status, and other factors. However, whether you make the purchase using fiat or cryptocurrency is not a factor when determining whether the transaction is subject to sales taxes.
Bottom Line: Make sure you understand applicable tax implications before making a purchase using cryptocurrency.
The information provided on this website does not, and is not intended to, constitute legal advice. Instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser.