However, having said that, most crypto users, and even otherwise, have their own understanding and opinion on the viability of these digital currencies in terms of an investment or saving. One must be rather hard-pressed to find someone who barely recognizes its “sticking” power, this also includes the IRS.
Adding to this, the initial iterations of IRS’s rules, starting with most new types of transactions, technology, or assets, IRS does not plan to make things simple or easy. As a matter of fact, you might also not be able to view the term “cryptocurrency” in the tax code.
Be it for an advantage or a disadvantage, the IRS does not yet seem to consider all corners of the working of cryptocurrency and how it could fit into the Internal Revenue Code (IRC), as per their released guidance to date.
However, they have surely made their intentions obvious about cryptocurrency being the ideal investment and a focus in coming years via their guidance with the question added to page 1 of Form 1040.
An ideal tip – If you are a taxpayer who owns cryptocurrency, you must keep a close eye on the developments, as and when they unfold. To help you better, we have curated this article that is specially designed for a taxpayer who transacts in cryptocurrency.
Cryptocurrency Taxes: Taxation and more!
According to the notice of the IRS, the virtual currency is treated as “property” and not just like any other “currency” for U.S. federal tax purposes. So much so that the general tax principles that otherwise apply to any form of property transactions also apply to the crypto transactions.
Here are a few common cryptocurrency transactions that you could look into:
- Cryptocurrency mining through “mining” rigs
- Cryptocurrency earning through “staking”
- Cryptocurrency earning through “rewards”
- Cryptocurrency received as payment for compensation or goods for services
- Cryptocurrency being used to pay for goods or services
- Cryptocurrency exchanges for another cryptocurrency (like exchanging Bitcoin currency for Chainlink)
- Cryptocurrency converting to or from “fiat currency.” This includes the U.S. dollar
As for the guidance from the IRS to date, here are a few general rules applied while determining the treatment of the transactions that involve the currency for the federal crypto taxes:
- If a taxpayer receives cryptocurrency as payment for the goods or services, or via mining or staking, then it is important to include the FMV (Fair market value) of the currency received in its gross taxable income. Here, the income is similar to the ordinary, just as when paid in other currency as an exchange for services. FMV of the cryptocurrency is then measured in U.S. dollars as of the receipt’s date, becoming the taxpayer’s basis in the virtual currency or the cryptocurrency.
- On the other hand, if the FMV of received property in exchange for cryptocurrency ends up exceeding the taxpayer’s adjusted tax basis in the exchanged crypto, then the taxpayer has a taxable gain. On the contrary, the taxpayer is at a loss if the property’s FMV received is lower/less than the cryptocurrency’s basis. Here, the rules in relation to the sale of the “property” apply with the gain or loss, either ordinary or capital gain. This depends on the holding period and/or other factors.
Let’s understand better with the help of an example:
Imagine Billy is an investor who purchases a Bitcoin for about $50,000 but then chooses to exchange the same for Chainlink when Bitcoin trades at $55,000. Here, the investor recognizes a capital gain of $5,000 on the exchange (provided Bitcoin’s holding period exceeds 12 months).
Simultaneously, if he purchases a Bitcoin for $50,000 and after about 12 months uses the same Bitcoin to purchase a car worth $60,000. Here, the investor recognizes a capital gain of $10,000.
Cryptocurrency Taxes: Other Crypto Tax Considerations
The taxpayers who hold or transact in cryptocurrency must consider the following:
- The capital losses acquired from the sales of the cryptocurrency must be eligible to offset the capital gains from other forms of transactions – also known as the “Tax Loss Harvesting.”
- The best way to lower the taxpayer’s liability is via donations of cryptocurrency in order to qualify charitable organizations. In case the cryptocurrency is held for more than a year, the deduction of contribution is allowed for the FMV of the cryptocurrency while donating with no recognition of the capital gain on it, that is if the requirements are met. On the other hand, if the cryptocurrency is held for less than a year, then the deduction would be of the crypto loss.
- The “wash sale” rule generally disallows a loss deduction on the sale of securities or stock, provided the taxpayer purchases the same stock or the securities for 30 days, otherwise, it triggers a loss. However, there are some reasonable arguments about the wash sale rule, of it not applying to cryptocurrency transactions since they are neither considered as a stock nor as security for tax purposes. But, the IRS hasn’t directly issued guidance on this topic to date.
Wrapping It Up!
As mentioned above, the cryptocurrency is here to stay and is slowly weaving its way into the US and other global markets. While most taxpayers utilize it in order to supplement the planning of tax and to help solve business problems, one must make sure to also include tax issues when considering how you either own or use the crypto coins.
Do not miss out on reporting your cryptocurrency transactions while planning your tax liabilities!
FAQs:
1) What are some of the cryptocurrency transactions?
Here are some of the common cryptocurrency transactions that you could look into:
- Cryptocurrency mining through “mining” rigs
- Cryptocurrency earning through “staking”
- Cryptocurrency earning through “rewards”
- Cryptocurrency received as payment for compensation or goods for services
- Cryptocurrency being used to pay for goods or services
- Cryptocurrency exchanges for another cryptocurrency (like exchanging Bitcoin currency for Chainlink)
- Cryptocurrency converting to or from “fiat currency.” This includes the U.S. dollar
2) What do you mean by Tax Loss Harvesting?
The capital losses acquired from the sales of the cryptocurrency must be eligible to offset the capital gains from other forms of transactions – also known as the “Tax Loss Harvesting.”
3) What is cryptocurrency taxed at?
The IRS treats the gains and losses on cryptocurrency the exact same way it treats any other kind of non-digital capital gain or loss. This implies that as a crypto trader, you will need to pay ordinary tax rates on short-term capital gains (depending on your taxable income) for assets held less than a year and long-term tax rates for assets held for more than a year.
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