How the US tax crypto
Crypto and taxes
There are roughly 59 million Americans who own some form of crypto, according to Finder.com. And that number has increased since the previous years. The same source also noted that 8.3% of Americans own cryptocurrency. But despite such a small number, IRS chief Charles Rettig says the country is losing about a trillion dollars every year in unpaid taxes, and he credits this tax gap, at least in part, to the rise of the crypto market. That said, the IRS has begun sending letters to virtual currency owners advising them to pay back taxes and file amended returns as part of tax compliance beginning in 2019. In this blog, we’ll discuss the basics of how crypto is taxed in the US.
READ: ABCrypto: The basics of digital assets
Bolder Group does not consider this article tax advice but merely a source of information that you can use as a reference for research or when discussing with a tax advisor. We’d also like to add that this blog solely focuses on US tax laws on crypto, and if you’re in another country or have a physical presence in a different one, we recommend looking for a different source.
Categorising what is taxable and what is not
When taxing crypto, we first need to identify if a transaction is either a taxable or non-taxable event. Let’s differentiate the two:
- Buying crypto with cash and holding it
- Donating crypto to a certified tax-exempt charity or non-profit
- Receiving crypto as a gift
- Giving crypto as a gift
- Transferring crypto to yourself
Taxable events (as income)
- selling crypto for cash
- converting crypto to another
- spending crypto on goods (including services)
Taxable events (as capital gains)
- getting paid in crypto (in exchange for goods and/or services
- mining crypto
- earning crypto staking rewards
- inheriting crypto
- Accepting crypto via Airdrop
What is crypto holding?
Crypto holding is when you technically hold crypto and wait for it to compound, or so. Similar to investing, depending on how the market is, holding crypto could either be a gain or a loss in the long run.
When it comes to taxing withheld crypto, there’s no gain or loss. Taxation only applies when the crypto is sold. However, there is another thing called long and short-term gains.
Short term vs long term gains
If your crypto has been on your account for 365 days or fewer, it will be taxed like ordinary income and subject to short-term capital gains tax. On the other hand, if it has been more than 366 days, taxes will be subjected to long-term capital gains – which is about 0-20% based on your ordinary income tax rate.
However, these taxes will not apply if you have not realised your gains or losses. This is why you need to identify your crypto income flow first before you can calculate your taxes.
Defining capital gains vs losses
Before diving into that, we first need to define what the cost basis is. When it comes to cryptocurrencies, the cost basis is the price or cost you spent initially when buying the crypto. However, when crypto is mined or staked, the cost basis is determined by the fair market value when it is received. Finally, a gifted crypto’s cost basis is determined by the sender and the fair market value simultaneously.
In simple thoughts
The US Law has defined virtual currencies like crypto as virtual properties which makes them taxable under IRS Notice 2014-21. It is best to note that taxing crypto will vary depending on its category – whether it is considered taxable or non-taxable. And taxable events can be categorised into two: capital gains and income. Finally, when holding crypto, taxes vary if it is held short or long-term.
Other IRS resources to guide you:
MORE ON CRYPTO: Dissecting DAC8 and its impacts on crypto
Money in codes: The why, the how and the risks of cryptocurrency
Bolder Group provides services for administering cryptocurrency funds including reporting through manual and automated reconciliation using API. Our processes and procedures are designed to eliminate inefficiencies, provide oversight and execute at the highest service levels. Visit our service page to learn more.