Walking the Crypto Tax Tightrope in US
Categories: US
Over the past year, investing in cryptoassets has been an unending wild roller coaster ride, with unexpected twists and turns. Most recently, investors have experienced exhilarating highs and plummeting lows. The Biden administration has issued an executive order, that seeks to create a framework of stricter and – some argue – more coherent regulations for the crypto sector. With annual tax filing deadlines around the corner for everyone, now is the time to prepare to shield your income from taxes and know how best to maximize your crypto gains and losses. The Internal Revenue Service (IRS) considers cryptoasset holdings "property" for tax purposes, which means it is subject to capital gains tax rules.For occasional traders or investors, crypto held for a year or less is subject to short-term gains rates and, held for more than a year, is subject to more favorable long-term capital gains rates.If you mine crypto as a hobby, include the value of the coins earned as "other income" on Form 1040 Schedule 1.Receiving interest income from crypto lending activities or liquidity pools is considered a form of taxable income and must be reported on your taxes, similar to mining and staking rewards. Trading crypto is very similar to trading stocks and other securities, so many of the same tax rules apply. Crypto traders must pay taxes on the profits they earn. Traders can also write off their trade as a capital loss if they lose money.Potentially, there is no impact on the taxes owed by the crypto holder; the debate is on the need to regulate crypto exchanges, which would benefit the crypto holder in tracking the crypto transactions. This would not make any difference in the tax implications as the IRS already treats virtual currency as property and is taxable as per capital gains tax rules. So, taxes are owed when crypto is sold or exchanged, similar to a stock or bond. Effective 2023, crypto brokers such as Coinbase will be required to record transactions, tracking them for customers and the IRS, similar to how stock and bond brokers currently do via tax form 1099-B. They'll have to disclose their customers' names, addresses, and phone numbers, the gross proceeds from sales, and any capital gains or losses. Also, businesses that receive payments of USD 10,000 or more in crypto must report the sender's identity to the government, mirroring a similar anti-money laundering rule for cash transactions of that amount. The Internal Revenue Code and regulations require taxpayers to maintain sufficient records to establish the positions taken on tax returns. You should therefore maintain records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.Suppose one receives crypto in exchange for goods and services (wages or contract work) or mining virtual currency. In that case, the crypto received is treated as income and must be recorded and reported as the fair market value of the crypto received and counted as income on your tax return. However, mining crypto is usually considered a self-employment activity. This means there is a need to pay self-employment taxes in addition to ordinary income taxes.When you eventually dispose of the crypto, this basis is used to calculate any capital gains and pay the applicable capital gains taxes. The following penalty amounts are effective for returns and statements required to be filed: