Though cryptocurrency is a digital asset, it has been classified as “real” property within the Internal Revenue Code of 1986. In the U.S., almost all revenue is taxable. If you earn revenue in cryptocurrency, this generally falls within U.S. tax law. In the U.S., you must report any gains to the IRS. It includes gains made when trading/selling your crypto for fiat currency. However, there is also some good news! The IRS allows cost basis deductions on sold crypto and margin trades on exchanges. The IRS has a tax compliance campaign related to crypto and taxes that make things clearer for those who have not paid taxes on the gains from their cryptocurrency transactions.
Are your cryptos holdings taxable?
Cryptocurrency falls under the property category, and hence holding crypto assets is taxable as framed by the IRS. In turn, your taxable income may be affected if you buy, sell, or trade cryptocurrency. Most cryptocurrency users will treat their crypto as a capital asset, and therefore a sale or exchange of crypto is subject to capital gains taxes. You may be subject to tax liability when you dispose of your crypto for payment of goods or services also.
Reporting cryptocurrency gains and losses
When buying and selling cryptocurrency, the profit or loss you make is taxed as a capital gain or loss.
1. Short-term capital gains and losses are calculated by subtracting the cost basis (the original price you bought the cryptocurrency for) from the sale price. If you are selling at profit margins, then it is a capital gain, and if you are selling at a loss margin, it is a capital loss. If you’ve been holding your coins for one year or less before officially selling them, then you will have short-term capital gains or losses.
2. Once you’ve held your precious coins for more than a year, it’s considered a long-term investment, and this will give long-term capital gains or losses. Long-term capital gains and losses follow the same process, but they are taxed at different rates.
Do the miners of bitcoins fall under the tax bracket?
If you are mining bitcoins, Ethereum, or other cryptos, it is taxable just as a regular source of income. In the case of bitcoin, miners, in a way, create it and therefore pay taxes on such creation. Likewise, individuals who trade or virtual exchange currency like bitcoins for goods or services are also subject to crypto and taxes based on the currency’s fair market value at the time of the trade or exchange. Miners are considered self-employed professionals, and hence their incomes are subject to the Self-Employment Tax. It applies both to mined crypto and crypto received as compensation for providing services such as verification or helping others to mine coins.
Filing of 1099 forms
Cryptocurrency providers will issue a Form 1099-K to users if they transact more than $20,000 and 200 transactions within the year. They are commonly used by third-party settlement organizations (TPSOs), including some cryptocurrency exchanges, to summarize and report merchants’ transactions over their payment platforms. If a TPSO sends you a 1099-K, it means at least one of your customers paid you through their system. The purpose of Form 1099-K is to help combat tax fraud. In particular, the form helps the IRS identify individuals who are conducting business but not paying taxes on their income.
Penalties for not paying your crypto taxes
If you make money through cryptocurrencies, you’ll need to pay crypto and taxes. Honest reporting makes IRS auditing easier and keeps your conscience clear. There are a few ways the IRS can figure out if you have made money on crypto. If they can’t gather enough information, they may order you to tell them how much crypto you reported on your tax returns, what accounts it’s held in, who the account holders are, and more. It can lead tax defaulters to criminal offenses, civil penalties, or both.
Are your cryptocurrency profits subject to FBAR filing requirements?
FBAR filing does not apply to investors in cryptocurrencies. But if the trading in digital currencies increases (it is increasing at an alarming rate), you may require FBAR filing. While nobody wants to pay more on crypto and taxes, there are options for those who do not wish to report their cryptocurrencies on their tax return. A good accountant is always a wise move, and one that is familiar with both the IRS and cryptocurrencies could be of great assistance when it comes time to file your taxes.
Cryptocurrencies trading has got a regulatory body?
For consumers, investing in an ICO can be an intimidating experience. While some ICOs are legitimate, many are essentially fraudulent investments that fail to live up to their goals or (in the worst-case scenarios) simply disappear with people’s money. Governments worldwide want to protect investors from scamming; governments have passed new laws to regulate what can and cannot be done with cryptocurrency ICOs.
The U.S. (SEC) regulates crypto and taxes from their end. The SEC has suggested regulating ICOs as securities, subject to the same federal laws that govern stocks and bonds. What exactly the SEC does—and how does it affect ICOs. The SEC’s main responsibility is to secure investment in cryptos. It ensures that those investing in stocks, bonds, and other securities do so with accurate information about the value or utility of these assets. ICOs often involve highly technical projects; therefore, SEC wants to ensure investors understand what they are purchasing. Additionally, it is theoretically possible for an ICO to fall under SEC guidelines if you find it not to be creating a sufficiently decentralized system.
Summary – The United States’ approach to taxing cryptocurrencies is clear and unambiguous. If you ever wished for a more streamlined and organized U.S. tax system for crypto and taxes, the good news is that they have the same thought. The IRS has published instructions on how users are expected to report their capital gain or loss and how exchange activities are taxed.