Taxability of Cryptocurrency: In the United States, cryptocurrencies are considered property, which means that transactions are subject to capital gains tax similarly to stocks or real estate.
If you sell crypto for more than you paid, the profit is taxable.
Short-Term vs.
Long-Term Capital Gains: If you hold your cryptocurrency for one year or less before selling, the gains are taxed at short-term capital gains rates, which are typically higher than long-term rates applicable to assets held for more than a year.
Reporting Obligations: Taxpayers must answer directly whether they have engaged in transactions involving digital assets when filing their 2023 federal income tax return.
Failure to report can lead to penalties.
Airdrops and Forks: Receiving cryptocurrency through airdrops is generally considered taxable income at the fair market value at the time of receipt.
Similarly, if you receive new coins from a hard fork, they are also taxable at their fair market value when received.
Mining Income: Income from mining cryptocurrencies is taxable as ordinary income.
The fair market value of the mined coins on the day they are received constitutes the income to be reported.
Wash Sale Rule: Unlike stocks, the wash sale rule does not currently apply to cryptocurrencies.
This means you can sell at a loss and repurchase the same crypto without the loss being disallowed for tax purposes.
Like-Kind Exchange: The IRS has stated that like-kind exchange rules do not apply to cryptocurrencies.
This means that you cannot defer capital gains taxes by trading one cryptocurrency for another as you could with real estate.
Stakes and Tokens: Staking rewards in cryptocurrencies are treated as income and are taxable when they are received, and the basis for subsequent sales is the value of the staking rewards at the time of receipt.
Gift Tax Considerations: If you give someone cryptocurrency as a gift, and its value exceeds $17,000 (as of 2023), you may need to file a gift tax return, although you may not owe any taxes due to the lifetime exemption.
Charity Contributions: Donations of cryptocurrency to recognized charities can provide you with a deduction equivalent to the fair market value of the asset, and you avoid capital gains taxes that would occur if sold.
Foreign Transactions: If you engage in crypto transactions with foreign exchanges or hold assets overseas, you may be subject to additional reporting requirements like the FBAR (Foreign Bank Account Report) due to their significant reporting thresholds.
Cryptocurrency as Payment: If you receive cryptocurrency as payment for goods or services, the fair market value at the time of receipt is treated as income and must be reported.
Tax Software Integration: Various tax software now integrates with cryptocurrency exchanges and wallets to simplify the process of reporting gains and losses, helping users calculate their tax obligations more efficiently.
IRS Guidance Updates: The IRS has revised its stance on how taxpayers should report their crypto-related transactions, recently emphasizing the importance of comprehensive reporting across various forms including Schedule D and Form 8949.
Penalties for Non-Compliance: The IRS can impose severe penalties for failure to report crypto transactions accurately, including fines and potential criminal charges in extreme cases of intentional fraud.
Legislative Changes: Ongoing legislative discussions may further refine tax treatment of digital assets, including changes to definitions and classifications of cryptocurrencies, which could affect future tax obligations.
Total Transaction Records: Keep comprehensive records of all transactions, including dates, amounts, and purposes, as IRS audits focus heavily on the accuracy and completeness of reported data.
International Tax Treaties: For US taxpayers involved with cryptocurrency overseas, international tax treaties may mitigate double taxation, but compliance with both jurisdictions’ requirements is necessary.
Tax Loss Harvesting: Strategies such as tax loss harvesting—selling assets at a loss to offset capital gains—can apply to crypto portfolios, allowing for inefficient sales to improve tax positions.
Blockchain Integrity and Auditability: The transparent nature of blockchain technology means that all transactions are recorded publicly, which could lead to increased scrutiny from tax authorities and heighten compliance expectations over time