Today, we will be covering five taxable events in the cryptocurrency space.
First, there are WAY MORE than five total taxable events that could be happening in your crypto ledger. Let's talk about some of the simpler ones.
You buy something
Let's say you buy a Bitcoin, and then you sell it. This transaction is a taxable event.
When you purchase the Bitcoin for US dollars, that establishes a cost basis of a capital asset. Then, when you sell that Bitcoin for US dollars (or any other cryptocurrency), this is called disposing of your asset. Very similar to if you bought a stock and then sold the stock. You then look at the difference between your cost basis (what you paid for it) and the fair market value of what you got for it on the day you disposed of it. The difference between what you paid and what you sold for is a capital gain or a capital loss.
Another prevalent one is exchanging coins. Say, I've got some sushi, and I exchange it using one of the many, many crypto exchanges out there on-chain for some Etherium. This transaction is not a 1031 exchange where you can ignore the taxes. This is considered a capital asset disposition is just like a sale. You "sold" your sushi in exchange for some Ether.
Staking + Interest
What about staking your coins on something like Celsius? You stake your Bitcoin, and you get paid interest. The staking itself, not a taxable event as you still have exposure to the underlying asset; the fluctuations in that underlying asset affect your net worth and your livelihood. However, the interest generated on that account paid to you by Celsius for rehypothecation of your coins is taxable income. This is true for all the DeFi staking as well. If you were to put your money into a Yearn finance pool, for example, you would earn interest from that Yearn Vault, and that interest would be taxable. It is challenging to calculate, but it would be taxable.
Lastly, you participate in some new coin drop. You use the function they create in their white paper, and new coins appear in your wallet. This is an airdrop. This will create a taxable income because you did not have an asset, and now you do have an asset. That's a taxable event and needs to get recorded as such.
There's a lot of other things one can do with their cryptocurrency, but those are the big ones that most people interact with that cause taxable events to occur. Hope this is helpful.