Here’s a fact–cryptocurrency is still a relatively new innovation, and as such, regulations and policies around it are still in formative stages. The system of cryptocurrency, while bustling and full of potential, requires a lot of supporting systems to have it fully integrated into the financial system. Trading cryptocurrency in the US has not escaped the watchful eyes of the Internal Revenue Service (IRS). So, individuals or businesses who interact with the digital means of exchange must be aware of laws evolving in the space.
Cryptocurrency and Taxation
Many people wonder if they are required to file taxes on their cryptocurrency investments. The answer is yes. The IRS classifies cryptocurrency as property, and cryptocurrency transactions are taxable by law, just like any property you might own.
This might not sit well with crypto traders and investors in the US. However, it is important to know that taxes are due whenever you sell, trade, or dispose of cryptocurrency in any way that fetches you gain.
According to the IRS, virtual currency transactions are taxable by law, just like transacting any other property. And so, taxpayers transacting in virtual currency may have to report those transactions on their tax returns. (You can check out the basics of cryptocurrency taxation regulations outlined by the IRS in IRS Notice 2014-21.)
But what does this entail for a newcomer to cryptocurrency who wants to invest wisely and legally?
It must be clarified that the act of buying crypto on its own is not a taxable event. You are free to buy and hold cryptocurrency without any taxes due to you, even if the value of your purchase increases. For your cryptocurrency to be taxable, there has to be a profit-incurring transaction, such as when you sell the cryptocurrency.
How is cryptocurrency taxed?
One reason crypto has been widely embraced is its decentralized, easy-to-use, easy-to-keep, and anonymous nature. As a result, individuals could build wealth without the interference or hindrances of traditional financial systems.
However, currently, the exclusion of government regulations has undergone some adjustments. For example, to check fraud and illegal transactions, the IRS began to ensure that crypto investors pay their taxes, depending on their income level, tax filing status, and how long the crypto is held before it is sold.
Those who own crypto for a year or less get to pay short-term gains taxes when they sell their holdings (equal to what is paid as income tax). However, those who hold their cryptocurrency for longer than a year must pay long-term gains tax (which is considerably lower).
There are different types of taxable events for cryptocurrency transactions, some of which include:
- Selling your cryptocurrency for fiat currency (that is, government-issued currency)
- Trading different types of cryptocurrencies ( Bitcoin, Ethereum, etc.)
- Receiving mined or forked cryptocurrencies
On the other hand, according to the IRS, some transactions are not taxable events. These include:
- Buying cryptocurrency with fiat currency
- Donation of cryptocurrency to a tax-exempt non-profit entity
- Transferring cryptocurrency between digital wallets
- Giftingcryptocurrency to a third party
When it comes to NFTs, you should also know what events are taxable when you create or mint. Selling of NFTs attracts a tax liability because your NFT is owned as a property of value.
On the bright side, your losses from crypto transactions are not taxed since it is categorized under capital losses. To prevent getting into trouble with the IRS, keep track of your bitcoin transactions.
One way to maximize profits from investments here is to open a crypto IRA which, just like other Individual Retirement Accounts, allows you to make tax-deductible contributions and makes your taxes due only when you withdraw funds.
Crypto taxation is could be quite complicated as it is still a new field. Should you need help or have questions on cryptocurrency taxation? Our experts are waiting for you.
Headed by Shauna A. Wekherlien (CPA, Masters in Taxation, and Certified Tax Coach), Tax Goddess is a tax and accounting firm that specializes in tax reduction, audit assistance, and accounting services. As a top 1% CPA in the US, what sets us apart from other CPA’s is our cutting-edge system in which our team of professionals, we are a team of experienced tax professionals who will work with you to develop a customized plan to reduce your taxes while creating the most-effective financial plan possible.
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