Cryptocurrency taxes can be confusing, not only for individual traders but also for exchanges and accountants. However, things have been moving out of the grey area in the past years, as the IRS has issued clearer guidelines regarding crypto taxation.
Some cryptocurrency-related activities are not subjected to taxation from the IRS, such as:
- Crypto purchased with fiat money;
- Donating cryptocurrency to charities or non-profit organizations;
- Giving your crypto as a gift to a third-party;
- Depositing and withdrawing crypto between your own wallets;
- Token swaps or mainnet swaps.
From IRS guidelines, Bitcoin and other cryptocurrencies are considered property, which incurs a capital gains tax. This means that crypto has to be treated like stocks, gold, real estate, or any other form of property.
Specific cases for cryptocurrency taxes:
- Using cryptocurrency to pay for goods or services
If you use cryptocurrency to buy and pay for a product or service, you need to keep a record of this transaction, which states the price of the bought item at the time of purchase.
This type of cryptocurrency taxes is rather confusing, as you have to declare that the gains of the price of the crypto you bought goes up, but you cannot declare a loss and get a tax deduction if the price goes down.
- Exchanging and trading cryptocurrencies
Exchanging and trading cryptocurrencies also subject investors to taxation. For example, if you trade your Bitcoin to purchase/sell Ethereum with it, you will have to report the difference in Bitcoin’s price between the price when you bought it and the price when you sold it, and also record the price of Ethereum when you bought it for future trades.
The same applies to crypto-to-fiat transactions. All these transactions have to be recorded and reported at tax time.
- Mining cryptocurrencies
Cryptos that were produced from mining also have to be declared as additional income in your tax return. Depending on your level of involvement, mining can be taxed as either a hobby or a business.
If you have a full-time mining rig, you will most likely be taxed as a business.
While hobby miners do not have to pay the 15.3% self-employment tax, they have fewer deductions for expenses compared to business miners.
- Staking cryptocurrencies
Income that comes from staking also incurs cryptocurrency taxes. Staking has the same taxes and classifications as cryptocurrency mining.
- Operating a masternode
Operating a masternode of a blockchain network rewards the user by giving mined cryptocurrency, which incurs the same cryptocurrency taxes as with crypto mining.
- Airdropped cryptos
The free tokens received through an airdrop can be classified as a gift, but if you receive a coin/token that you already own, it can be seen as an incentive/dividend instead. In the latter case, you have to report the tokens as additional income.
- Hard forks
The coins resulted from hard forks are taxed as ordinary income.
- ICOs and IEOs
Participating in an ICO or IEO is also subjected to taxing, as you trade cryptocurrency for other tokens that will be issued in the future.
- Lending cryptocurrency
Lending your cryptocurrency to generate interest has to be reported to the IRS. This is similar to staking/mining coins and subject to analogous rules. You will need to determine if you are operating as a hobby or a business and file your income accordingly.
- Borrowing fiat against cryptocurrency
Taking out a fiat loan against a cryptocurrency collateral is not currently considered a taxable event by the IRS. However, the sale of the collateral is subjected to capital gains taxing.
Long Term and Short Term Capital Gain Taxes
Cryptocurrency capital gain taxes can be divided into two categories: long-term and short-term. Long-term applies to investors that have owned currency for a year or more before selling or trading, while short term applies to cryptocurrencies that have been held for less than a year.
The cryptocurrency tax rates will vary according to state and current tax bracket.
Information you will need for tax purposes:
- Date of the trades;
- Price of the crypto at the time of selling/buying;
- The net gain or loss;.
- Date of transactions;
- Receipts proving the exchange of the crypto;
- Digital wallet records;
- Cryptocurrency addresses records;
- Description of trade and other trading parties;
- Exchange records;
- Accounting and legal costs;
- Software and hardware costs (mining);
- Cryptocurrency tax software.
We hope that our article has helped you have a better understanding of cryptocurrency taxes and what you should do when tax season comes.
Featured image: bitnewstoday.ru