Digital Assets as Property: In the United States, the IRS categorizes cryptocurrencies as property rather than currency, meaning that transactions can trigger capital gains or losses depending on the asset's appreciation or depreciation since purchase.
Taxable Events: Specific actions such as selling crypto for fiat, exchanging one cryptocurrency for another, or using crypto to pay for goods and services are considered taxable events, while simply holding crypto does not trigger taxes.
Holding Period: The length of time an investor holds cryptocurrency affects the tax rate applied to gains.
Short-term gains (assets held for one year or less) are taxed at ordinary income rates, while long-term gains (assets held for more than one year) benefit from lower capital gains tax rates.
Reporting Requirements: As of 2023, taxpayers who received, sold, exchanged, or disposed of digital assets must check a specific box on their tax returns, indicating compliance with crypto tax reporting obligations.
Record Keeping: The IRS recommends maintaining detailed records of all cryptocurrency transactions, including dates, amounts, involved parties, and purpose.
Accurate records help ensure proper reporting of capital gains and losses.
Losses Deductions: Capital losses from crypto investments can be used to offset capital gains from other investments, potentially reducing overall tax liability.
If losses exceed gains, individuals can deduct up to $3,000 against ordinary income.
Unique Identification and Cost Basis: When calculating capital gains, identifying the specific cryptocurrency sold (especially if multiple transactions occur) is crucial.
Methods like First In, First Out (FIFO) or Specific Identification must be applied to determine cost basis accurately.
Airdrops and Staking: Income generated from crypto airdrops and staking activities is considered taxable.
Such events are taxed as ordinary income based on the fair market value when received.
State and Local Considerations: In addition to federal tax obligations, many states have their own tax rules regarding cryptocurrencies, potentially affecting overall tax obligations.
Tax Software Tools: Various software options exist to simplify the process of calculating and reporting crypto taxes, integrating with exchanges to automatically track transactions and generate necessary forms.
Cryptocurrency Loss Carryforwards: If a taxpayer has significant capital losses from cryptocurrency, they may carry forward those losses to future tax years, potentially offsetting future capital gains.
IRS Enforcement: The IRS is increasingly focusing on cryptocurrency compliance, with enhanced data-sharing agreements with exchanges that report user activity, highlighting the importance of accurate reporting.
Foreign Assets Reporting: If a US taxpayer holds more than $10,000 worth of cryptocurrencies outside the US, they may be required to report it on the Foreign Bank Account Report (FBAR), emphasizing international compliance.
Wash Sale Rules: Unlike stocks, the IRS does not currently recognize the "wash sale" rule for cryptocurrency, allowing investors to realize losses for tax purposes even if they repurchase similar assets soon after.
Crypto-to-Crypto Transactions: Exchanging one cryptocurrency for another is taxed as a sale of the first and a purchase of the second, invoking capital gains/loss reporting requirements for both transactions.
Tax-Free Crypto Transfers: Transferring cryptocurrency between wallets owned by the same individual typically does not constitute a taxable event, but accurate records of each wallet's movements are important.
Loss of Access: Loss of access to a cryptocurrency wallet, rendering the assets unrecoverable, does not create a capital loss unless the loss is formally recognized through legal means.
IRS Letter 6174: The IRS has issued guidance indicating it will send letters to taxpayers showing cryptocurrency activity, advising about potential penalties for non-compliance and underscoring the importance of accurate reporting.
Potential Legislative Changes: As crypto regulations continue evolving, prospective tax reforms could significantly influence how cryptocurrencies are taxed, making it important for taxpayers to stay informed about legislative changes.