The IRS classifies cryptocurrencies as property, not currency.
This means trades and transactions are treated similarly to stocks or real estate, leading to capital gains or losses.
Capital gains tax rates in the US depend on how long you've held the crypto before selling.
Assets held for more than a year qualify for long-term capital gains tax rates, which are generally lower than short-term rates.
As of 2024, the long-term capital gains tax rates can be 0%, 15%, or 20%, depending on your taxable income, while short-term gains are taxed as ordinary income according to your tax bracket.
A significant change in reporting requirements came in 2023, where taxpayers must check a box on their tax forms indicating whether they engaged in transactions involving digital assets during the year.
It's essential to keep detailed records of every cryptocurrency transaction.
The IRS requires reporting of the date acquired, date sold, amount received, and the basis (cost) for each asset.
Staking rewards, a common practice where crypto holders can earn additional tokens, are considered income and must be reported as such, taxable at ordinary income rates.
If you receive cryptocurrency as payment, it is also treated as income.
The fair market value on the date of receipt is used to calculate taxable income.
Losses incurred from crypto trading can be used to offset capital gains from other investments, known as tax-loss harvesting.
If your losses exceed your gains, you can also use up to $3,000 of those losses to offset ordinary income each year.
There are special considerations for “like-kind exchanges” that could previously apply to certain cryptocurrency trades.
However, the Tax Cuts and Jobs Act of 2017 limited like-kind exchange treatment strictly to real estate.
If you gift cryptocurrency, it is not subject to tax until it is sold by the recipient.
However, the donor is required to report any gift exceeding $17,000 in 2023.
Failure to report cryptocurrency transactions can lead to significant penalties and interest.
The IRS has been increasing enforcement efforts, making compliance more critical.
As of 2024, there is ongoing discussion in Congress about simplifying rules and possible regulatory clarity on crypto tax treatment, though no concrete changes have been enacted yet.
The IRS has created educational resources and FAQ sections on their website specifically for cryptocurrency to aid taxpayers in understanding their obligations.
If you engage in crypto trading using derivatives or futures, these may be subject to different tax treatment under Section 1256, which can result in a mix of short- and long-term capital gains.
A notable case arose from the IRS issuing a "John Doe" summons to cryptocurrency exchanges seeking the identities of users who had transactions exceeding a certain threshold, underlining the government's push for transparency.
There’s a concept called the “wash sale rule” which prevents taxpayers from claiming a tax deduction for a security sold at a loss and repurchased within 30 days.
However, currently, this rule does not apply directly to cryptocurrency.
The costs related to mining cryptocurrency also have tax implications; miners must recognize income when they successfully mine a block, calculated at fair market value at that time.
If a taxpayer dies holding cryptocurrency, it can be passed on to heirs or beneficiaries, and the fair market value at the time of death becomes the new basis for the beneficiary, minimizing potential capital gains due.
Various states have shown interest in how cryptocurrencies are taxed at the state level, which can vary significantly, as not all states recognize cryptocurrencies the same way as the federal government.
In future developments, tax software is continuously evolving to incorporate cryptocurrency transactions, allowing for more streamlined and user-friendly calculations to ensure compliance with the latest tax regulations.