More than 10% of Americans traded cryptocurrency in the previous year, and many are concerned about how their behavior may affect their taxes. The IRS (Internal Revenue Service) and state tax authorities in the United States must be informed of cryptocurrency sales, conversions, payments, and income. This article explains when you must pay taxes on cryptocurrency and how your activities might affect those taxes.
The Internal Revenue Service (IRS) is the revenue service for the United States’ federal government. It collects taxes and enforces the Internal Revenue Code, which is the central part of the federal statutory tax law.
Cryptocurrencies such as Bitcoin and Ether are subject to capital gains tax restrictions. The amount of capital gains taxes you owe depends on whether you’ve owned your bitcoin for less than a year or more than a year. If you bought your coins more than a year ago, you might be eligible for a long-term capital gains rate that is lower than most income taxes.
If you’re a taxpayer in the United States, you’re undoubtedly familiar with seeing your federal and state income taxes taken from your pay stubs. You’ll generally owe the income tax rate applicable to your tax bracket when you file it. As a cryptocurrency owner, you are also subject to these taxes (such as mining, staking, and awards). These taxes are often not withheld or deducted.
When is crypto not taxable?
- Receiving a gift
You will not pay taxes on cryptocurrency until you trade it or engage in another taxable activity, such as staking.
- Giving a gift
You can give up to $15,000 per recipient each year tax-free. Gifts may include cryptocurrency sent to someone else without making a purchase for goods or services.
- Purchasing cryptocurrency using cash and storing it
Buying and holding cryptocurrencies is not a taxed activity in itself. You often have to pay taxes when you sell because you’ve “realized” the gains.
- Donating cryptocurrency to a tax-exempt organization or non-profit
You may be able to claim a charitable deduction if you donate cryptocurrency directly to a 501 (3) nonprofit organization, such as GiveCrypto.org.
- Transferring to yourself
The transfer of cryptocurrency between wallets or accounts is tax-free. You can carry over your original cost basis and acquisition date to continue tracking your possible tax effect when you sell.
Where is it taxable?
- Spending on items & services
Spending cryptocurrency isn’t all that different from trading it to the IRS. Before you can swap the asset for an item or service, you must first sell it, and selling crypto subjected it to taxes on capital gains. If you are using bitcoin to order a pizza, for example, you will very certainly owe taxes on the purchase.
- Selling cryptocurrency for cash:
Did you sell your cryptocurrency for US dollars? If you trade your assets for much more than you bought for them, you’ll have to pay taxes on the difference. You might well be able to deduct a loss from your taxes if you sell at a loss.
- Converting one cryptocurrency to another:
If you use bitcoin to acquire ether, you must technically trade your bitcoin before purchasing the new asset. The IRS deems this to be taxable since it is a sale. If you traded your bitcoin more than you bought for it, you’d have to pay taxes on the difference.
Where is it taxable as income?
Bitcoin as a Paycheck: NFL offensive lineman Russell Okung was one of a few famous people who accepted bitcoin as a salary in 2021 — and it’s likely he pays income tax on it. As a result of following Okung’s advice and receiving compensation in cryptocurrency from your employer, you will be subject to taxation based on your tax bracket.
Accepting cryptocurrency in return for products or services: If you take cryptocurrency in exchange for a good or service, you must declare it to the IRS as income.
- Mining cryptocurrency
If you mine cryptocurrency, you would almost certainly owe taxes on your gains based on the fair market value (typically the price) of the mined currencies at the time they were acquired. Crypto mining for profit is taxed as self-employment profit.
- Earning staking rewards
Staking is similar to lending crypto. As a reward, you receive crypto – similar to earning interest – for helping certain secure blockchains. Since interest is income, stakes are subject to income tax.
Taxes on stake rewards work the same way as on mining revenues. Taxes are determined based on the current market value of your rewards on the day you got them.
- Earning more income
You may be able to make a return by owning specific cryptocurrencies. These cryptocurrencies are subject to taxation. The IRS treats this differently than bank interest, even though you might call it income.
- Obtaining crypto through a hard fork
Tax rates on crypto obtained through a hard fork vary depending on how you utilize the asset when it is available for withdrawal from the exchange and other factors.
- Receiving an airdrop
A cryptocurrency firm may offer an airdrop as part of a marketing campaign or promotion. Receiving an airdrop is taxed as income, and you must record the amount on your tax return.
- Achieving additional incentives or rewards
There are a lot of ways why you can obtain free cryptocurrency. These can include prizes or incentives such as receiving $5 in bitcoin for bringing a friend to a crypto exchange. In any case, you must declare these as income.
Thus, we can say that crypto is taxable or not taxable, depending on the case. You now know where you will have to pay taxes. You should not underestimate the importance of tax deductions and tax regulations. It is highly recommended that you know about them before investing. For more updates on crypto, keep an eye on this space.