US Tax policy on Cryptocurrency
According to IRS Notice 2014-21, the IRS views cryptocurrencies as property, necessitating the reporting of capital gains and losses on Schedule D and Form 8949 when needed.
Despite the fact that cryptocurrencies are decentralized and virtual and that the IRS sees them as property, your gains and losses from crypto transactions will normally have an impact on your taxes. Loss due to sales, it can be offset with capital gains and reduced tax. If losses exceed gains, a deduction of up to $3000 is available. Any remaining losses can be carried forward to future tax years. For income such as mining or staking, it must be reported as taxable income on your tax return. The amount of the income is equal to the fair market value of the cryptocurrency on the date it was received.
Following type of activities are considered as a taxable event:
- Selling cryptocurrency: If you sell your cryptocurrency for a higher price than what you paid for it, the difference is considered a capital gain and is subject to taxation.
- Trading cryptocurrency: Trading one cryptocurrency for another is also considered a taxable event. If you trade your cryptocurrency for a profit, the difference is subject to capital gains tax.
- Using cryptocurrency to purchase goods or services or using crypto cards: If you use cryptocurrency to purchase goods or services, these type of transaction is considered as a taxable event.
- Receiving cryptocurrency as payment for goods or services: If you receive cryptocurrency as payment for goods or services, the value of the cryptocurrency at the time of the transaction is considered as taxable income.
- Mining cryptocurrency: If you mine cryptocurrency, the fair market value of the cryptocurrency at the time it was mined is considered taxable income.
It's important to consult with a crypto tax professional to fully understand your tax obligations when it comes to cryptocurrency transactions.
To prepare for the upcoming tax filing season, you should gather all of your crypto transactions from the past year and determine the cost basis, sale price, and any gains or losses. Use cryptocurrency tax software or a crypto tax professional to help you with this process. Some of the top crypto tax firms are Bitcounts Inc, Polygon advisory, etc. It’s important to accurately report your cryptocurrency transactions on your tax return to avoid penalties and interest from the IRS.