- IRS issued initial guidelines for crypto taxation in 2014.
- Taxation for crypto is similar to traditional taxation.
For every trader or investor, a significant issue is crypto taxation; it stays the same for people indulged in DeFi and NFTs. The Internal Revenue Service of the United States issued its first guidelines for cryptocurrency taxation in 2014 but asked taxpayers to report crypto investments in 2019.
The U.S. Crypto Taxation Scenario
Since 2014, the U.S. IRS rules for crypto taxation have remained unchanged. Rules state that cryptocurrency and other blockchain-based digital assets are treated as property, not currency, to file taxes. Also, any transaction involving cryptocurrencies that creates profit for the user is taxable by law in the United States.
Crypto provides its users anonymity, making many think that the IRS cannot track their transactions and investments. However, a disclosure agreement is in place with the centralized exchanges and data analysis from blockchains. This means that the IRS can find any individual’s digital asset ownership.
How to Report Digital Assets During Tax Filing?
A crypto investor and a taxpayer must report gains. One must report the digital asset transactions in any fiscal year in Form 1040 while filing taxes. The centralized crypto exchanges must file form 1099-K informing the IRS about investors making annual transactions over 200 worth $20,000.
Recently, the IRS has been trying to connect crypto wallets with their owners to strengthen the U.S. crypto taxation scenario. Users usually connect their wallets with their bank account, credit or debit card, or share custodial wallet addresses with centralized exchanges. Trained IRS agents can use these breadcrumbs to connect the dots.
Capital Gains vs. Cryptocurrency Taxation
Capital gains tax is based on profits from selling or disposing of capital assets. Real estate, stocks, and gold are premium examples of capital assets. Cryptocurrency gains are view with a similar lens and are tax accordingly. For instance, if Bitcoin worth $20,000 is held until the profit gained is 25%. While selling, the profit would be $5,000, which would be subject to capital gains tax.
If an individual holds crypto for long, it is subject to long-term capital gains. Typically, selling before a year is short-term and vice versa. Taxation for the long-term is less than the short-term.
When is Crypto Taxed and When it is Not?
While taxing crypto, the IRS never distinguishes between any cryptocurrency. Be it Proof-of-Work (PoW), Proof-of-Stake (PoS), altcoins, or stablecoins all are treat the same. But there are certain cases where crypto is not tax and vice versa.
It’s non-taxable when a user buys crypto with their money and “hold” onto it. Also, moving tokens and cryptocurrencies from one wallet to another is a non-taxable event. But selling, trading, or getting paid in crypto is taxable. Also, mining activities are subject to taxation from the IRS.
Individuals and businesses must report the mining rewards differently. Individuals should fill in details in Form 1040 Schedule 1 and businesses and institutional miners should report in Form 1040 Schedule C. There are also ways to write off capital gains about capital losses, but there is a limit to it.
Crypto emerged as an alternate currency and challenged the traditional financial system, especially fiat currency. As gains above a specific limit are subjected to taxation, crypto is, too. What the government does with the taxes is a different ball game, and people have different approaches.