Memes to Millions: The Tax Implications of Sudden Crypto Wealth

Meme
coin
seasons
are
known
for
frenzied
market
activity,
driven
by
the
meteoric
rise
of
viral
crypto
projects
that
transform
modest
investments
into
fortunes
overnight.
The
world
knows
dogecoin

(DOGE)
is
the
original
meme
coin,
but
a
gang
of
newcomers
has
stormed
the
2024
meme
season.
There’s
a
puppy
wif
a
hat
{{WIF}},
a
smirking
frog

(PEPE),
a
clumsy
sloth
{{SLERF}}
and
more.

Memes
are
fun,
especially
when
you
find
six
or
even
seven
figures
in
your
portfolio
overnight.
But
with
market
mania
and
potential
for
generational
wealth
come
tax
considerations
and
the
potential
for
astronomical
mistakes.

Zac
McClure,
MBA,
is
the
co-founder
and
CEO
of
TokenTax.

SLERF
is

a
prime
example
of
the
possible
tax
pitfalls
that
lurk
during
meme
mania.
At
TokenTax,
we
think
about
crypto
taxes
every
day
and
had
to
weigh
in:

While
most
meme
millionaires
won’t
face
such
an
extreme
scenario,
there
are
tax
considerations
to
remember
during
meme
season
and
after
the
party
stops.
It’s

important
info
to
bare
in
mind,
as
“Tax
Day,”
individual
income
tax
returns
are
due
to
be
submitted
to
the
federal
government,
approaches
this
April
15.

U.S.
taxpayers
don’t
need
to
sell
crypto
for
USD
to
create
tax
consequences.
Crypto-for-crypto
trades
trigger
taxable
events,
and
not
knowing
or
ignoring
this
can
lead
to
bad
outcomes.
It’s
tempting
to
invest
meme
profits
into
another
crypto
without
parking
your
future
tax
bill
in
stablecoins
or
cash.
If
your
portfolio
then
plummets,
this
can
leave
you
with
massive
tax
debt.
Ouch.

Trading
crypto
for
crypto
in
the
U.S.
and
many
other
regions
is
taxable,
so
it’s
possible
to
“make
it”
on
paper
during
meme
season,
then
lose
it
all
when
the
market
turns
and
the
tax
man
expects
his
cut.
Investors
should
consider
their
tax
obligations
with
every
trade
and
plan
accordingly.

Congratulations,
you
made
it
trading
memes.
Let’s
talk
taxes.
The
Internal
Revenue
Service
(IRS)
considers
crypto
to
be
property.
Crypto
taxes
for
U.S.
taxpayers
are
the
same
as
short-
and
long-term
capital
gains
for
stocks
or
regular
income
tax.
Briefly:

For
more
information,
see
our
guide
to

crypto
tax.
Tax
consequences
will
vary
for
taxpayers
from
state
to
state
and
internationally,
and
we
suggest
consulting
with
a
crypto
tax
professional
and
your
local
authorities
for
guidance.

There
are
a
couple
of
main
ways
most
taxpayers
can
optimize
their
crypto
sales
to
minimize
taxes:

A
wash
sale
occurs
when
someone
sells
a
crypto
or
security
for
a
loss
and
quickly
rebuys
the
same
or
similar
crypto
or
security
to
receive
tax
benefits.
The
wash
sale
rule
prohibits
selling
securities
at
a
loss
and
reacquiring
them
within
30
days
to
prevent
taxpayers
from
making
“artificial”
losses
to
lower
tax
liability.

While
the
IRS
hasn’t
yet
applied
the
wash
sale
rule
to
cryptocurrencies,
proposals
have
aimed
to
extend
it
to
digital
assets.
Investors
should
exercise
caution
and
consult
with
crypto
tax
professionals
before
engaging
in
activities
that
could
be
considered
wash
sales.

The
sobering
reality
of
tax
planning
naturally
follows
the
euphoria
of
meme
season.
Accurate
record-keeping
is
essential.
Understand
how
crypto
taxes
work,
and
you’ll
ensure
the
dream
of
an
epic
meme
season
doesn’t
become
a
tax
nightmare.