What is the tax laws in cryptocurrency?
Buying and selling crypto is taxable because the IRS identifies crypto as property, not currency. As a result, tax rules that apply to property (but not real estate tax rules) transactions, like selling collectible coins or vintage cars that can appreciate in value, also apply to bitcoin, ethereum, and other cryptocurrencies.
The federal government is convinced about the potential for income from back-due taxes that the White House wants to give the IRS an extra $80 billion and new powers to crack down on tax dodgers, including those parking their cash in crypto.
“The IRS is in the business of collecting revenue,” said Shehan Chandrasekera, a CPA and head of tax strategy at CoinTracker.io, a crypto tax software company.
For one, the IRS hasn’t exactly made it easy to report this information.
Tax year 2019 was the first time the IRS explicitly asked taxpayers whether they had dealt in crypto. A question on form Schedule 1 read, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
The question was vague, and crucially, not everyone files this specific document. As per understood, investors who invested through platforms like Robinhood didn’t report it as cryptocurrency since there are no wallets where they hold, buy or sold the cryptocurrency. A Schedule 1 is typically used to report income not listed on the Form 1040, such as capital gains, alimony, or gambling winnings.
So in 2020, the IRS upped its game by moving the virtual currency question to the 1040 itself, which is used by all individuals filing an annual income tax return.
″[They put it] right after your name and Social Security number, and before you put any income numbers or deduction numbers in. This made the question virtually impossible to miss.
Important Exceptions
Charitable contributions and gifts of crypto and tax implications
~Recipient of a gift: If you receive crypto as a gift you are not likely to have a taxable event until you sell the crypto. When you do, your cost basis will be the same cost as the person who gifted it to you.
~Person who gives the gift: You can gift crypto up to $15,000 per recipient per year without paying taxes. If your gift exceeds $15,000 per recipient, you are required to file a gift tax return.
~Charitable donations: If you give crypto directly to a 501 (3) charitable organization, you can claim a charitable deduction equal to the fair market value of the donated cryptocurrency.
Below are some non-taxable events:
Taxable
- Cryptocurrencies are treated as property. For example, when buying cryptocurrencies like Bitcoin, Ethereum , Litecoin or any other cryptocurrency for $10,000 and then selling them for $50000, this means there is a face value of $40,000 in capital gains tax. Therefore, this is a taxable income just like selling a house or property.
- Buying with cryptocurrency is also a taxable event. For example: Buying food, electronics and any other items using cryptocurrency are taxable events. Even buying NFTs using ether is also a taxable event. This is because when buying with crypto, government treats it as liquidating the assets and using it as cash or any other property.
- Mining cryptocurrency for fun is treated as self employment income, tax software like Turbo Tax and TaxBit has contracted with IRS and does the audits of all the transactions. For mining proceeds the tax rate can vary from 10% to 37%. Crypto miners have to pay taxes on the fair market value of the mined coins at the time of receipt
Gains and Losses
*Each transactions occur, investor has to figure out from the face value of the transaction was a loss or gain. Losses may be used to offset capital gains in a given tax year, plus $3,000 — this means that any losses incurred on bitcoin and other crypto may be deductible.
*Day trading or buying a small portion at one price and then buying more at another price, then sold for profit or loss can be confusing during tax filing. In this situation, one can use the Specific Identification Method, one should consult with their accountants or tax advisors during this situation.
*Staking and Hard Fork: Those who use Coinbase, sometimes receive free crypto as a reward is considered as free money and this is treated as an ordinary income with a fair value of the market price of the day it was received. Just like Coinbase, Gemini platform allows stacking of crypto which means giving interest on crypto is will be treated as an ordinary income since this is free money.
Stablecoins
Stablecoins are cryptocurrencies whose value is pegged to the US$ and the value is always $1, so there is no change in value. Buying for $1 and selling for $1, so there is no gains or loss in this event but this is still taxable and has to be reported.
Important Terms
Long-term vs short-term gains
If you’ve sold a asset, you need to determine whether the asset was long-term or short-term. Long-term means that you held the asset for over a year before selling or disposing of it, while short term applies to assets you’ve held for less than a year. Long-term capital gains are often taxed at more favorable rates than short-term capital gains.
*Long Term Capital gains tax rate can be 0% 15% or 20% depending on the overall taxable income. Since the asset has been held for over year or more
*Short Term Capital gains are assets held for less than a year and this is considered as an ordinary income or regular income. The tax rate can be between 10% to 37%.
Important Forms
Some of the forms which will be required during Tax filing:
- Form 8949
- Form 1040 (Schedule D, Capital Gains and Losses)
- Form 1099 (Miscellaneous Income)
The forms are received from the brokerage platforms on which the assets were traded, in addition, they can be uploaded on the tax filing software like TurboTax.
Fshahim's Blog 