The US has taxation laws in effect for those who are in the crypto space. If you buy, sell, trade, or use crypto, then these laws are applicable to you, depending on the circumstances. Even with guidelines from the IRS, it can get confusing due to many conflicting statements online. Like any other transaction for assets and investments, you’ll need to report any gains you make.
To help reduce the confusion and provide direction for those into cryptocurrency, here is what you need to know:
IRS Statements
The Internal Revenue Service (IRS) has made it known to the public that cryptocurrencies are taxable assets and they would treat it similarly to how they deal with property. When you file for taxes, you’ll have to state any transactions you’ve done within the past tax year. Depending on the transaction, it may be taxable.
So, any crypto, from notable ones like Bitcoin to lesser-known ones, need a report. Any selling, conversion, and payment made through crypto needs reports from taxpayers. However, since it follows the rules of property transactions, you can compare crypto taxes to that of collectibles. It is like a luxury car that appreciates in value.
You’ll need to provide full disclosure of any crypto-related transaction you make. If you don’t, you can face penalties if the IRS discovers you were withholding information. Of course, the best approach is to consult a tax expert when filing for taxes.
How Do I Know if I Owe Taxes?
There are several taxable categories that involve crypto-related transactions. The list is as follows:
- Receiving mined crypto
- Using crypto to buy other crypto
- Paying for products or services using crypto
- Receiving crypto rewards through staking and airdrops
- Crypto salary
- Selling crypto for cash (must be a gain or else the loss is a deductible)
The computation will always be done using fair market value. Let’s say you bought a Tesla using Bitcoin when it was available. You’ll use the cost of the Tesla in dollars during comparisons. For airdrops and lottery winnings, they can have ordinary income tax at the fair market value during the date of receipt.
There are also non-taxable transactions, including:
- Holding crypto after buying (HODLing)
- Transferring between crypto wallets
- Donating to a non-profit or tax-exempt charity
You’ll need a full report of all your transactions. If you trade or purchase crypto through an exchange, they can provide you with information about your past transactions. Losses are deductibles, while gains are taxable. From there, you’ll probably need a tax professional to handle the filing. You’ll have to fill out several forms such as:
- Form 8949: Reports of transactions that are gains or losses
- Form 1099-MISC: Miscellaneous income (staking and other rewards)
- Form 1040: Summary of your capital gains and losses
Capital Gains and Losses
Crypto taxes only apply if you realize a profit from your endeavors. If you’re holding and have not yet sold or used the crypto, it counts as unrealized gains, so it does not apply.
For example, you bought Bitcoin at $20,000 and its value is now at $40,000. There are no taxes on it until you sell it back to cash. If you convert it back to cash, you have capital gains of $20,000, which would be taxable. However, if you bought $40,000 worth and sold it for $30,000, you would owe nothing in taxes. You can even use the losses to offset other gains.
The same applies if you use Bitcoin. For instance, you had $20,000 in Bitcoin and then later used Bitcoin when it was $30,000 to buy a car. You would have to pay capital gains taxes on the $10,000 profit.
The longer you hold crypto, the lower your tax will be. Long-term capital gains (over one year) have lower taxes, depending on your annual income. Short-term gains (within one year) have the normal income tax rate. Here are some other possible scenarios for capital gains:
- You bought $20,000 in Bitcoin and then later converted it to buy $30,000 worth of Ethereum. You would owe taxes for the $10,000 realized profit.
- You participate in crypto mining. You receive 5 Ethereum through mining rewards. You would owe taxes based on the value of that 5 Ethereum at the time you received it.
- You participated in a cryptocurrency contest and won an airdrop equivalent to $1000 of that crypto. The $1000 taxes as ordinary income based on its value at the time you received it.
Prepare for Your Taxes in Advance
Like anything else involving taxes, the best move is to prepare for it in advance. You need to gather information about your crypto-related transactions. If you find it too overwhelming, the best solution is to hire a tax professional to help you so that you don’t miss any crucial details. There are now many tax professionals that also specialize in crypto.
Sources:
Yes, your crypto is taxable. Here’s how to report virtual currency to the IRS, https://time.com/nextadvisor/investing/cryptocurrency/cryptocurrency-tax-guide/
How is cryptocurrency taxed?, https://www.forbes.com/advisor/investing/what-are-cryptocurrency-taxes/
Cryptocurrency and taxes: what you need to know, https://sea.pcmag.com/personal-finance-products/36263/cryptocurrency-and-taxes-what-you-need-to-know
