Cryptocurrency is still a relatively new phenomenon in the world of finance, and as such, the taxation of cryptocurrency is still a gray area for many countries. The United States is no different, and the IRS has been slow to provide guidance on how to tax cryptocurrency transactions. This has led to a lot of confusion among cryptocurrency investors, and has even led to some lawsuits.
However, there are a few things that we do know about the US taxation of cryptocurrency. In this article, we’ll take a look at what we know and how it might affect you.
Cryptocurrency is a digital or virtual asset that uses cryptography to secure its transactions, to control the creation of new units, and to verify the transfer of assets. Cryptocurrencies are decentralized – they are not subject to government or financial institution control. Bitcoin, created in 2009, was the first and is the most well-known cryptocurrency.
The US Internal Revenue Service (IRS) has guidance on the taxation of cryptocurrency. In 2014, the IRS issued Notice 2014-21, which provides that cryptocurrency is treated as property for US federal tax purposes. This means that general tax principles applicable to property transactions apply to transactions using cryptocurrency.
The sale or exchange of cryptocurrency is a taxable event. If you sell cryptocurrency for cash, the fair market value of the cryptocurrency at the time of the sale is taxable as ordinary income. If you exchange cryptocurrency for another cryptocurrency, the fair market value of the cryptocurrency exchanged is taxable as ordinary income.
If you hold cryptocurrency as a capital asset, you will be subject to capital gains tax when you sell or exchange it. Long-term capital gains are taxed at a lower rate than short-term capital gains. The holding period for cryptocurrency is one year.
If you mine cryptocurrency, the fair market value of the cryptocurrency at the time it is mined is taxable as ordinary income.
If you engaged in any transactions using cryptocurrency, you will need to report them on your tax return. This includes all sales and exchanges of cryptocurrency, as well as any income from mining.
You will need to keep records of all your cryptocurrency transactions. This includes the date of the transaction, the type of transaction, the amount of cryptocurrency involved, and the value of the cryptocurrency in USD at the time of the transaction.
First and foremost, it’s important to note that the IRS treats cryptocurrency as property, not currency. This means that you’ll be subject to capital gains taxes on any profits you make from buying and selling cryptocurrency.
The capital gains tax rate in the US is 20%, so if you made $100 from selling cryptocurrency, you would owe $20 in taxes.
However, there are a few exceptions to this rule. If you hold cryptocurrency for less than a year before selling it, you’ll be subject to short-term capital gains taxes, which are the same as your ordinary income tax rate. So, if you’re in the 25% tax bracket, you would owe 25% of your profits in taxes.
Another exception is if you use cryptocurrency for business purposes. If you are paid in cryptocurrency for goods or services, you will owe taxes on those funds as if they were income. The tax rate will depend on your ordinary income tax rate.
Lastly, if you simply use cryptocurrency as a way to store or invest your money, you will not owe any taxes on those funds until you sell or exchange them for another currency.
If you’ve made any profits from buying and selling cryptocurrency, you’ll need to file a capital gains tax return. This is separate from your regular income tax return.
You’ll need to report your capital gains and losses from all cryptocurrency transactions, even if you didn’t make a profit. You’ll also need to keep track of your cost basis, which is the original value of the cryptocurrency you purchased.
If you’ve used cryptocurrency for business purposes or have been paid in cryptocurrency, you’ll need to report that income on your tax return. The income will be taxed at your ordinary income tax rate.
Lastly, if you’ve simply been holding cryptocurrency as an investment, you won’t owe any taxes until you sell or exchange it. When you do, you’ll need to pay capital gains taxes on the difference between your cost basis and the sale price.
So, that’s a quick overview of the US taxation of cryptocurrency. As you can see, it’s a complex topic, and there are a lot of different rules that apply in different situations.
If you’re thinking about investing in cryptocurrency, it’s important to speak to a tax professional to make sure you understand the US tax laws and how they apply to you.
Looking to receive professional help with your cryptocurrency and United States tax liabilities? Our team of taxation experts have years of experience dealing with cryptocurrency and can help you minimize your tax burden. Contact us today to get started!