The IRS classifies cryptocurrency as property, not currency, meaning each transaction could trigger a taxable event, similar to selling stocks or real estate.
Capital gains tax applies when you sell, trade, or otherwise dispose of cryptocurrency.
If you held the asset for a year or less, it's considered a short-term gain and taxed at ordinary income rates, which can be as high as 37% for high earners.
If you hold a cryptocurrency for more than a year before selling, it qualifies for long-term capital gains tax rates, which are lower, ranging from 0% to 20% depending on your income bracket.
The IRS requires taxpayers to report all cryptocurrency transactions, including those that result in losses.
Not reporting them could lead to penalties or issues with your tax filings.
Airdrops and staking rewards are also taxable events.
The fair market value of the cryptocurrency when you receive it must be reported as income.
You can offset gains with losses through tax-loss harvesting, allowing you to reduce your overall tax liability by selling underperforming assets to balance the gains from profitable ones.
If you use cryptocurrency to purchase goods or services, the transaction is treated as a sale of the cryptocurrency.
You must report any gain or loss based on the difference between the purchase price and the fair market value at the time of the transaction.
The IRS has specific forms for reporting cryptocurrency taxes, including Form 8949 for reporting capital gains and losses, and Schedule D for summarizing those transactions.
In 2023, the IRS introduced a new question on tax returns asking if you engaged in any cryptocurrency transactions during the year, making it crucial to keep thorough records.
Certain states may have their own regulations regarding cryptocurrency taxation, which can differ from federal laws.
It's important to be aware of your local jurisdiction's rules.
Many crypto tax software programs exist to simplify the calculation and reporting process, allowing users to import transaction data from various exchanges and wallets.
The concept of "like-kind exchanges" that previously allowed tax-deferred exchanges of similar assets does not apply to cryptocurrencies, as they are now considered property.
Cryptocurrency mining can create taxable income, calculated as the fair market value of the mined cryptocurrency at the time it is received, and can also lead to capital gains when sold.
If you receive cryptocurrency as payment for services, it is treated as ordinary income, and you must report it at its fair market value when received.
Tax regulations around crypto are still evolving, with potential changes expected in the coming years, particularly concerning reporting requirements and taxation models.
Some jurisdictions may allow you to deduct expenses related to mining or trading cryptocurrencies, which could reduce taxable income if you can substantiate those expenses.
The IRS has been increasing its scrutiny of cryptocurrency transactions, including sending warning letters to taxpayers who potentially failed to report their crypto income accurately.
In 2023, the infrastructure bill included provisions that may affect crypto taxation, particularly concerning reporting requirements for brokers and exchanges, aiming to enhance tax compliance.
The "wash sale" rule, which prevents taxpayers from claiming a tax deduction for a security sold at a loss if a substantially identical security is repurchased within 30 days, does not apply to cryptocurrencies, adding complexity to tax strategies.
Some taxpayers may consider using self-directed IRAs for cryptocurrency investments, which can provide tax advantages, but these accounts come with strict regulations and reporting requirements.