US Tax Implications on Crypto-Currency Transaction
Common Crypto Activities:
- Buying cryptocurrency is not a taxable event. The tax liability shall arise only when it has been sold or disposed of.
- Selling crypto for fiat money, i.e., Government-issued currency, is taxable as property, meaning any gains arising on the sale are taxable as capital gains. For example, if you buy $2000 of Bitcoin (this is your cost) and later sell it for $2500, you will incur a capital gain of $500.
- Trading one type of crypto for another type is again taxable as a capital gain.
- Using crypto as payment for goods and services constitutes disposal, and any gains or losses that occurred will need to be disclosed in Form 8949.
- Cryptocurrency of any sort, earned via mining or staking, is subject to taxation as income. In contrast to the preceding examples, any profits made here will be taxed at the ordinary income tax rates rather than capital gains tax rates. The taxed amount will be equal to the asset’s fair market value at the time the coin is mined (not sold). If it is later sold, it will result in a second taxable event, and you will be required to report the capital gain or loss on Form 8949. Any money earned from receiving payment in cryptocurrency, like mining or staking cryptocurrency, is taxable as income. This must be reported on Form 1040.
Taxability of Crypto-Currency Transaction in the US:
- When selling an asset, such as stocks, one must pay taxes on cryptocurrency gains. This could include selling your cryptocurrency for cash, exchanging one cryptocurrency for another, or accepting a cryptocurrency as payment. You may also be required to pay taxes on cryptocurrency income earned through mining, staking, or receiving payment in cryptocurrency.
- If you do not report your crypto taxes, the IRS can prove intentional disregard for knowingly failing to report your tax details.
- If you received cryptocurrency as income, it would be taxed at your ordinary income tax rates. However, If you dispose of your cryptocurrency, any profits will be taxed at the capital gains tax rate. The tax applicable varies based on how long you hold the asset and your income levels.
- If you have held a cryptocurrency for more than a year before selling it, long-term capital gain tax rates will be applicable to your capital gains.
- Alternatively, if you sold crypto after a holding period of less than one year, these gains will be taxed at the short-term capital gains rates. The tax rates are the equivalent of your ordinary-income rate.
- Cryptocurrency losses must be reported on your IRS Form 8949. Similar to cryptocurrency gains, However, there is a silver lining here. If you sold your cryptocurrency at a loss, you could use that loss to compensate your capital gains or to claim a capital loss deduction.
A deduction of up to $3,000 in capital losses per year is possible by the method of capital loss deduction. Furthermore, if you had more than $3,000 in net capital losses, you can carry this amount forward into future years. This carried forward amount can be used to offset capital gains or to reclaim the capital loss deduction.
- Donating or gifting cryptocurrency does not fall under the ambit of taxable events. Hence, you will not recognize any gains or losses when gifting or donating.
Making a donation after holding the cryptocurrency for a timeframe of less than one year, the itemized charitable deduction will still be applicable, but the deduction will be restricted to the price you paid for the cryptocurrency (your cost-basis).
Donating the cryptocurrency after holding it for less than one year, you are still eligible for the itemized charitable deduction, but the deduction amount will be limited to the price at which you obtained the crypto (your cost-basis).
What Forms will I need for Crypto Taxes in the US?
- Schedule D
- 040 Schedule 1 or 1040 Schedule C (in some cases)
- IRS Form 8949
Cryptocurrency, its regulation and classification by the IRS, the taxes it is subject to, and how its use affects tax liabilities are all subject to constant change.
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