A longstanding question that confuses crypto holders in the U.S. is if you pay taxes when spending crypto. Many U.S. taxpayers are surprised to learn about taxes when making purchases with their crypto, given the new range of companies offering cryptocurrency as a payment option. Today, we explore all the taxes involved when spending crypto to buy goods or services.
Do you have to pay taxes if you buy something with Crypto?
In short, yes!
According to the IRS guide, when you purchase a good or service with cryptocurrencies, you need to calculate your capital gains/losses on the deemed sale of your crypto. When you buy something with crypto, you’re exchanging crypto for service or product, which will lead to a capital gain or loss. You determine the gain/loss by calculating the difference between the Fair Market Value (FMV) of your crypto and your basis in the crypto. When you purchase something with crypto, it is as if you first swap crypto for FIAT, then instantly use the fiat to make the purchase. In the US, all trades between cryptocurrencies or crypto-to-FIAT trades are taxable events, leading to a capital gains/loss scenario. For clarification on all taxable events when trading crypto, please check this comprehensive guide.
It is worthwhile mentioning that sometimes merchants can accept payment in crypto while not converting it to FIAT. However, it doesn’t matter whether you convert your crypto to fiat for the purchase or if the seller is receiving crypto from you and keeping it. In all those cases, the capital gain tax treatment for you is still the same.
For example, Tesla announced it would keep all the Bitcoin they received from selling Tesla after accepting BTC as a payment option. In that case, you’ll still be liable for capital gains tax, even though the company is not converting any crypto to FIAT or another crypto. Recently, Tesla retracted this payment option, but other companies follow the same methodology of accepting Bitcoin and other digital assets as payment options and keeping them on their balance sheets. In those cases, the same tax implications apply to you, the payee. You can check our guide with all the tax implications of buying a Tesla with Bitcoin.
Let’s simulate the taxes of spending crypto to buy a designer bag.
1. John buys Bitcoin
In May 2021, John bought the Bitcoin dip and acquired 0.5 BTC for $24K as the Bitcoin price was $48K.
2. John buys a designer bag for $2000
In July 2021, John wants to buy a designer bag for his mother’s birthday and purchases it for $2000 worth of Bitcoin. Let’s imagine that in July, 1 Bitcoin price is $60K. As a result, John will be selling 0.03333 BTC at the current price.
3. John has a capital gain
First, John’s cost basis in Bitcoin was $48K per coin, which means he will need to recognize a capital gain when making this purchase because the BTC price at the time of the designer bag purchase is higher. His cost basis in fiat currency is $1,599.99 (0.03333 BTC *$48K).
John’s capital gain is the difference between the $2,000 purchase and his $1,599.99 cost basis.
Since John is making this purchase after two months of acquiring Bitcoin, he will have a short-term capital gain, which the tax rates range from 10% to 37% depending on many factors (e.g., his total taxable income, filing status, etc.). If John held his Bitcoin for more than 12 months before making this purchase, he would have a long-term capital gain, taxed at a more favourable tax rate, ranging from 0% to 20%.
Check our ultimate guide of crypto taxes to clarify all your doubts regarding trading, earning, or spending crypto.
Do I pay the same taxes when spending with a crypto debit card?
Whether you’re making purchases by sending crypto directly to the seller or through a crypto debit or credit card, you’ll still be subject to capital gains tax. The payment method you use to buy goods or services with crypto does not eliminate the existence of a taxable event. You can check in our article a tax simulation when purchasing with crypto debit cards.
If you are looking to start spending your crypto, check our list of the best crypto debit cards in 2021 available for US and European users.
Crypto debit cards are indeed a good payment gateway for crypto holders to use for purchases, but be aware of the tax implications of making your daily purchases with crypto.
Do I also pay for sales taxes?
It depends. It is a common question for crypto holders concerning purchases with crypto.
Whether you’re buying goods or services with crypto or FIAT, if the product in question is subject to sales tax, you’ll have to pay it. Most states in the US charge a sales tax that can go up to 9% for your purchase, while some states don’t charge sales tax for that same purchase. In the states with a sales tax, you’ll have to pay it regardless of the payment option (crypto or FIAT).
If I receive a gift and then buy a product, do I need to pay taxes?
In the US, receiving a gift is usually not a taxable event. However, if you use that crypto gift to purchase any goods or service, you may need to pay a capital gains tax. It will depend on the difference between the FMV of the crypto at the time of the purchase and your basis in the crypto, which is usually the same as the donor’s cost basis. If you track the basis of crypto gifts you received with a crypto tax software like CoinTracking, you can easily calculate the gain/loss when you use the crypto for purchases later.
Purchasing, trading, or spending crypto comes with a series of tax implications and reporting obligations. Please be aware of those before actively investing or spending cryptocurrency and take advantage of the tools and crypto accountants available to help you make educated decisions.
Learn CoinTracking automatically calculate your gains from purchases with crypto:
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Importing transactions(API & CSV) from 110+ exchanges/wallets.
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Imports for Binance Smart Chain trades through our BSC Importer.
Automatic Gains calculations with 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB).
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If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service, provided by a team of crypto tax professionals led by Sharon Yip, the export CPA who helped us put together these insights. Follow our weekly AMAs on Twitter where Sharon Yip answers your crypto tax questions.
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How Crypto tax laws save money for Bitcoin hodlers
2021’s NFT guide (with taxes).
Is Bitcoin taxable? The ultimate guide for 2021 taxes.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.