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Understanding Crypto Taxation: A Comprehensive Guide for Businesses

By David Kemmerer, Co-Founder and CEO of CoinLedger


In this guide, we’ll break down everything businesses should know about cryptocurrency taxes — including how everyday transactions are taxed and how you can report your capital gains and income on your tax return.

How is cryptocurrency taxed for businesses?

Cryptocurrency is subject to income and capital gains tax in the United States. 

Income tax: When you buy cryptocurrency, you’ll recognize income based on the fair market value of your crypto at the time of receipt. This also includes earning crypto as payment for goods and services. 

Capital gains tax: When you dispose of cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it. Examples of disposals include selling cryptocurrency or trading one cryptocurrency for another. 

Income tax and capital gains tax apply to businesses and individuals. 


How much tax will my business pay on cryptocurrency? 

How much tax your business pays on cryptocurrency disposals depends on the structure of your business. 

Sole proprietorship: If your business is a sole proprietorship, you will pay the individual rate on income and capital gains. 

Flow-through entity: If your business is a flow-through entity, income and capital gains will flow through to each business owner and be taxed based on individual tax rates. 

C-Corp: If your business is a C-Corp, your income and capital gains will be taxed at a flat rate of 21%. 


Will my business pay capital gains tax or income tax? 

Proceeds from cryptocurrency disposals may be taxed as income or capital gains, depending on the nature of your business. 

If you’re a business that receives cryptocurrency for goods and services, cryptocurrency will likely be treated as a capital asset. This means that disposals will be subject to capital gains tax. 

However, it’s likely that cryptocurrency should not be considered a capital asset for all types of businesses. For example, it can be argued that cryptocurrency should be regarded as inventory for crypto mining businesses. Therefore, proceeds from disposals would be taxed as income rather than capital gains. 

If you’re unsure whether cryptocurrency will be considered inventory or a capital asset for your business,  contact your tax professional. 


How is receiving cryptocurrency as payment taxed? 

When you receive cryptocurrency as payment, you’ll recognize income based on the fair market value of your crypto at the time of receipt. 

John’s restaurant receives $1,000 of BTC in exchange for food. 
John’s restaurant recognizes $1,000 of income. 


How is selling crypto/using crypto to pay off business expenses taxed? 

Selling cryptocurrency or using crypto to pay off business expenses are considered disposals of crypto. In cases like these, it’s likely that your business will incur a capital gain or a loss. 

While cryptocurrency is subject to income tax and capital gains tax, you won’t be taxed on the same income twice — you’ll only pay capital gains tax based on how the price of your crypto has changed since you originally received it. 

To better understand how this works, let’s look at an example. 

Maria’s business receives $2,000 of ETH in exchange for goods and services. 
The price of Maria’s ETH rises to $2,500. 
Maria’s business sells ETH for USD. 
Maria’s business recognizes $2,000 of income and $500 of capital gain.


Should I convert my crypto to fiat after receipt? 

While you are not required to immediately convert your cryptocurrency to fiat after receipt, many business owners do this to limit their potential capital gains. 

If you believe that your cryptocurrency will appreciate in value in the future, you can continue to hold it for the long-term. However, you should keep accurate records of your crypto transactions to easily calculate your capital gains and losses. Crypto calculators can be helpful tools for this.


When are cryptocurrency transactions non-taxable?

Typically, cryptocurrency is subject to tax only when it is earned or disposed of. 

For this reason, moving your cryptocurrency between different wallets is not taxable. It’s generally a good rule of thumb that if the ownership of the cryptocurrency does not change, there is no taxable event. 


How is holding cryptocurrency as a business taxed? 

There is no tax simply for holding cryptocurrency. You will not be required to pay taxes unless you dispose of or earn crypto rewards. 

It’s important to remember that holding crypto can potentially lead to tax benefits. Capital gains from cryptocurrency held for more than a year are taxed at a lower rate for individual investors. If your business is structured as a flow-through entity, holding your cryptocurrency for over 12 months can reduce your tax bill. 

How are crypto losses taxed as a business? 

If you dispose of your cryptocurrency at a loss, it can be considered a capital loss. Capital losses can offset capital gains and potentially reduce your tax liability. 

Remember, you’ll have to dispose of your cryptocurrency to recognize a capital loss. If you are holding your cryptocurrency, there is no taxable event — and therefore, no capital loss. 


Can you write off cryptocurrency as a business expense? 

Ordinary and necessary expenses related to the course of doing business can be claimed as a tax deduction. For example, if you used cryptocurrency to pay relevant business expenses, you can claim a tax deduction based on the fair market value of the crypto at the time of the disposal. 


How do I prepare for tax season if I have cryptocurrency transactions? 

If your business involves cryptocurrency transactions, you should keep detailed records showing your cryptocurrency’s fair market value in USD at the time of receipt and disposal. Your records should contain the following information: 

  • The type of crypto involved in the transaction
  • The amount of crypto involved in the transaction
  • The date you received the cryptocurrency
  • The date you disposed of the cryptocurrency 
  • The fair market value of your crypto at the time of receipt 
  • The fair market value of your crypto at the time of disposal 
  • The cost of relevant fees 


If you paid your employees in cryptocurrency, you will need to keep records of the value of the cryptocurrency at the time of payment so you can accurately report this information on your W2 Form. 


How do you report crypto business taxes to the IRS? 

How to report your cryptocurrency taxes depends on your business structure. 

How do I report taxes as a sole proprietorship? 

If you’re running a sole proprietorship, your income and capital gains should be reported on your individual tax return. That means income should be reported on Schedule C of Form 1040, and capital gains should be reported on Schedule D of Form 1040. 

How do I report taxes as a corporation or flow-through entity

If your business is set up as a flow-through entity, your business capital gains should be reported on Form 4797, Sales of Business Property, and should flow through to your Form 1040, Schedule D. 

Your business income should be reported as well. Here’s the form you can report your income for a few common types of business entities: 

C-Corp: Form 1120 

S-Corp: Form 1120S 

Partnership: Form 1065

If your business is a flow-through entity, your flow-through income should also be reported on Form 1040, Schedule E. 


In conclusion 

If your business deals with cryptocurrency, maintaining meticulous records of your income and capital gains is essential. Quality record-keeping not only saves you time and effort during tax season but also, with our collaboration with BYDFi, provides you with efficient tools for quick and time-saving calculations anytime.”


Author Biography: David Kemmerer

David Kemmerer is the Co-Founder and CEO of CoinLedger. David has been involved with the cryptocurrency industry since 2017, when he began experimenting with automated trading systems to execute market-making and arbitrage strategies. Eventually running into the difficult tax reporting problem, David launched CoinLedger with his two co-founders in 2018 to automate the entire cryptocurrency tax reporting process. Prior to launching the company, David worked within sales and go-to-market teams inside of software giant Oracle.

David has spent the past three years building the CoinLedger product and team to solve the tax reporting and portfolio tracking challenges that cryptocurrency users face. David is a Forbes Finance Council member and an expert on the tax implications of digital assets.

In his free time, you can find David out on the water, playing music or reading somewhere in Austin, Texas, where he currently resides.