Crypto assets are taxable and therefore must be traced and reported to the Internal Revenue Service (IRS). The U.S. IRS has become more interested in the taxation of this industry as its acceptance and appeal have expanded.
Cryptocurrencies are not considered to be assets or property in the U.S., but rather transactions. Penalties and fines may apply if these transactions are not appropriately tracked and reported.
It should be noted that, in the U.S., just buying crypto, which lies in your portfolio, is not taxable in itself. Taxes only apply when you sell, invest, or otherwise dispose of the asset for gains. Capital gains tax and income tax are the two types of taxes that apply to cryptocurrencies in the U.S.
Crypto Capital Gains Tax and Income Tax
Profits from the sale of an asset that was acquired at a lower cost are subject to capital gains tax. Cryptocurrency gains are regarded as short-term gains if they were kept for less than a year. It is considered a long-term gain if it was held for longer than a year.
Additionally, using crypto to pay for goods and services is seen as a taxable event for capital gains. The exchange of one digital asset for another, or trading, is also seen as a capital gains event. This included using cryptocurrencies to buy NFTs.
Income from token mining and staking is subject to income tax on cryptocurrency transactions. These include receiving crypto through an airdrop or any interest payments made in cryptocurrency for loans made using decentralized finance (DeFi). Additionally, earning crypto in exchange for labor is seen as an income tax event.
For long-term gains, single individuals making up to $44,625 in cryptocurrency earnings would not be subject to taxation. According to income tax brackets, the rates for people filing as heads of household or married couples filing jointly range from 0% to 20%.
The tax rates for short-term gains will be determined using ordinary income tax rates. Depending on the income levels for single filers, married couples filing jointly, and heads of household, they range from 10% to 37%.
Tracking transactions
In order to fulfill all tax commitments, it is crucial to precisely track, report, and analyze all crypto transactions. Some people might only need to take screenshots of the few transactions they’ve made over the year. Others may find it laborious to track cryptocurrency transactions across all Web3 ecosystems.
There are a number of software programs designed specifically for tracking and producing data for cryptocurrency transactions. Koinly, CoinLedger, and Accointing are some popular choices.
Reporting crypto tax
To report the sales and disposals of capital assets, utilize crypto tax Form 8949. In the form, part I is for the short term, and part II is for the long term.
Depending on whether your transaction was disclosed on Form 1099, you must tick the appropriate box at the top of the form. Tax Form 1099 B is used to report a variety of income received during the year, including income from stock investments and cryptocurrency. Exchanges are supposed to issue this form.
You will likely need to choose option C (on Form 8949), which is applicable to brief transactions that were not previously reported, as the majority of exchanges do not provide Form 1099-B for cryptocurrency transactions.
After completing Form 8949, you must add up your total gain (or loss) and include it on Schedule D of Form 1040. Form 1040 is the most used format for filing individual income tax returns in the US. All cryptocurrency income, as well as any capital gains or losses from transactions, must be disclosed on your 1040. Self-employment is considered to occur when cryptocurrency income is obtained as a business entity through labor payments, operating a mining operation, or drawing on staking income. The Schedule C of Form 1040 must provide a report of them.
Income through airdrops, forks, or other sources, such as wages and hobby money, is reported on Schedule 1 of Form 1040 under “other income.” It is advisable that you take the help of tax professionals to correctly guide you through the steps. Any miscalculations or mistakes could potentially result in a fine.