The popularity of cryptocurrencies and the widespread adoption of many crypto assets made 2021 a significant year for cryptocurrencies. This is clear from recent research by Grayscale Investments, which showed that more than half of Bitcoin investors just recently began investing in virtual currency. Investors saw several highs and lows throughout the 2021 cryptocurrency boom, resulting in losses and gains. As consumers wonder whether cryptocurrencies are taxable, investors in such crypto assets are increasingly interested in the tax laws around them.
Cryptocurrencies are taxable in all states throughout the United States of America, although the tax rates may vary. Buying, spending, and selling cryptocurrency are often taxed events. Investors must account for their capital gains and losses when calculating their taxes. If they accept cryptocurrency as payment, they may also be required to pay income taxes.
Tax evasion attempts may result in monetary fines and even severe consequences. Since each jurisdiction is different, it is recommended to consult tax professionals who can make this somewhat confusing process of filing tax returns not only simple and easy but also help you understand the required tax forms.
This article explains how cryptocurrency is taxable. It further clarifies the process through which cryptocurrency is taxed in the USA.
How is Cryptocurrency Taxable?
The Internal Revenue Service or IRS of the United States considers cryptocurrency assets to be convertible virtual currencies or “property” for tax purposes. This implies that your virtual currency is taxable, like stocks or gold.
It also implies that any earnings or revenue generated using cryptocurrencies is taxable. However, there is much to understand about how cryptocurrencies are taxed since it depends on many factors. Depending on specific criteria, you may or may not owe taxes for your cryptocurrency. If you own or use cryptocurrencies, you should be aware of when you’ll be taxed so that you are not in trouble when the IRS asks for tax on your crypto assets.
To make it clear that virtual currency is recognized as property for tax purposes, the IRS released Notice 2014-21 in 2014. According to this notice, cryptocurrency is taxable as a financial instrument, and investors must report any gains or losses from taxable events on Form 8949.
The IRS began questioning people about their use of virtual currencies on filed tax returns in 2019. Now, a question reading “[a]t any point during [the current tax year], did you receive, sell, exchange, or dispose of any financial interest in any virtual currency?” appears on the front of Form 1040.
This way, the IRS emphasized that there is no longer space for taxpayers to argue that they were unaware that cryptocurrency transactions must be recorded by putting this subject front and center. The IRS checks whether Form 8949 has been submitted if a taxpayer selects Yes. If the taxpayer fails to file their cryptocurrency taxes, the IRS can impose a penalty on any tax payments that are not correctly reported.
What is a Crypto Taxable Event?
A taxable event is a transaction or event for which you must pay taxes. These events are not frequent. An event that is taxable in one jurisdiction may not be in another. All transactions that involve the sale of assets, stocks, and other investment securities are subject to taxation. Purchasing virtual currencies such as Bitcoin or Ether using fiat currency is probably nontaxable. But buying or exchanging your cryptocurrency may be subject to taxes.
A taxable event will result in capital gains (profits) or capital losses. If such an asset you own gains value, and you sell it for a profit, you have made capital gains. Capital losses are experienced when you trade or sell an asset at a loss.
Again, the taxing status of capital gains is determined by the investor’s local tax authorities. One may be able to decrease their taxes by deducting capital losses from capital profits. The sum of these factors primarily determines the total tax burden. To assist with this calculation, taxpayers should record the transaction’s date, purchase price, selling value, and related fees.
Cryptocurrency Tax Rates:
Tax rates on cryptocurrency differ depending on how long you’ve kept it. Active crypto traders will likely pay short-term capital gains taxes on their transactions, which will be more than the long-term capital gains taxes a crypto HODLR may pay.
The amount of cryptocurrency tax you owe in the United States is determined by how long you kept the assets before selling them and your income tax rate.
Technically, we can understand the cryptocurrency tax rates in two parts
Short-Term Crypto Profits:
The tax rate on profits from a cryptocurrency asset held for less than a year is the same as the investor’s tax threshold. Up to $3,000 in losses may be utilized to reduce income taxes. Any further losses may be carried through.
U.S. Crypto gains tax rates for short-term profits (Source: Smartasset.com)
Long-Term Crypto Taxes:
For crypto investments held for more than a year, the tax on capital gains is significantly reduced: 0%, 15%, or 20%, depending on the individual or joint income.
U.S. Crypto gains tax rates for long-term profits (Source: Smartasset.com)
The Takeaway – How To File the U.S. Crypto Taxes
Preparing and filing your crypto taxes may be challenging, especially if you’ve never done that before. Gathering all crypto activity is the first stage, which is also the most time-consuming and crucial phase in the filing procedure.
Some people may need to record one or two transactions to accomplish this. However, it may be a daunting process for more seasoned investors engaged in yield farming, airdrops, and other forms of cryptocurrency trading. To avoid doing everything at once, it is often better to monitor your transactions as you go during the tax year.
You must determine any capital gains and losses after completing the first stage. Our exclusive crypto tax platform also offers services to help ease this rather lengthy process for you; we do not only educate our clients on the process but help them minimize their taxes through our experienced cryptocurrency tax accountants.
The next step is to complete Form 8949 and attach it to Form Schedule D. Cryptocurrency income must be included on Schedule 1 of Form 1040. Profits from self-employment must be included in Schedule C. Finally, you must file your U.S. cryptocurrency taxes before the deadline, and you will be good to go.
Careful tax planning is essential for success in the unpredictable and volatile cryptocurrency economy. HQ Tax & Financial focuses on our taxpayer’s objectives and formulates a consistent strategy in order to limit their tax liability as a result of heft crypto gains and preserve wealth. We assist our clients with the intricacies of tax accounting and cryptocurrency compliance. These services include but are not limited to how to treat initial coin offering (ICO) transactions by both investors and developers and how to navigate the intricacies of reporting foreign financial assets and foreign bank and financial accounts. Stay up to date on the latest trends, news, and all things cryptocurrency! We publish information related to cryptocurrency tax services, mining, forking, lending, Defi, NFT, and recent IRS guide, how to track your capital gains base, and more! Be sure to follow us on Twitter, LinkedIn, or any other social media platform to have cryptocurrency tax-specific blog posts delivered directly to you.