Cryptocurrency is treated as property by the IRS, meaning that transactions can trigger capital gains taxes similar to stocks or real estate.
When you sell or exchange crypto, the difference between your purchase price and the sale price determines your gain or loss.
If you hold your cryptocurrency for more than one year before selling it, you'll qualify for long-term capital gains rates, which are generally lower than short-term rates that apply if you sell within a year.
Each time you trade one cryptocurrency for another, it can trigger a taxable event.
For example, exchanging Bitcoin for Ethereum creates a capital gain or loss based on the value of Bitcoin at the time of the swap.
The IRS requires taxpayers to report all types of cryptocurrency income, including staking rewards, hard forks, and airdrops.
Failure to report can result in significant penalties.
A critical aspect of accurately reporting crypto taxes is keeping meticulous records.
This includes the date of acquisition, purchase price, date of sale, sale price, and any transaction fees.
The IRS has established a specific question on tax return forms asking whether you received, sold, sent, exchanged, or otherwise acquired any financial interest in digital assets during the tax year.
Answering "yes" can trigger additional scrutiny.
Like other investments, losses from cryptocurrency sales can offset gains, possibly reducing your overall tax liability.
This process is known as tax-loss harvesting.
Some taxpayers may not realize that simply holding Bitcoin or altcoins isn't taxable; it’s the transactions, sales, or exchanges that incur taxes.
Taxpayers have a choice between two methods for calculating capital gains: the first-in, first-out (FIFO) method, which assumes the first crypto purchased is the first sold, or a specific identification method that identifies which units were sold.
The IRS has been increasingly focused on cryptocurrency compliance and has established partnerships with blockchain analytics firms to track crypto transactions and identify non-compliance among taxpayers.
If you donate cryptocurrency to a registered charity, you can deduct the fair market value of the donation from your taxable income.
However, it’s important to ensure the charity is qualified, or the deduction may not be valid.
In 2024, some changes are expected to IRS regulations concerning cryptocurrency taxes, so staying updated is essential to avoid potential penalties or misreporting.
Penalties for failure to report income from crypto transactions range from a percentage of unpaid tax to additional fines or criminal charges, depending on whether the IRS deems the omission willful or accidental.
IRS Form 8949 is specifically used to report sales and exchanges of capital assets, including cryptocurrency.
Form 1040 Schedule D summarizes the total capital gains and losses reported on Form 8949.
Cryptocurrency held in retirement accounts, such as a self-directed IRA, can provide tax advantages, as gains on investments in these accounts are tax-deferred until withdrawal.
Certain transactions involving stablecoins might not incur capital gains taxes, but interest earned on stablecoin holdings could be classified as ordinary income.
Understanding how blockchain technology works can provide deeper insight into the nature of cryptocurrency transactions and their implications for tax reporting.
The IRS uses blockchain analysis to identify unreported cryptocurrency transactions, so evasive practices may lead to detection and legal repercussions.
Some jurisdictions are experimenting with their own cryptocurrencies or central bank digital currencies (CBDCs), which may have different tax implications than traditional cryptocurrencies.
As of September 2024, tax software tools may include features specifically designed to track crypto transactions and calculate tax liabilities accurately, making the process easier for taxpayers.