Virtual currency transactions, including through cryptocurrency, in the US are taxable, just like any other kind of property. That’s why if you are trading or transacting in the US, it is important to know about virtual or crypto tax reporting to ensure compliance with the law. Currently, the US does not recognise cryptocurrency as legal tender, but it can function similarly with fiat currency in some settings. In this blog, we will provide a basic overview on crypto tax reporting in the US and how the Internal Revenue Service (IRS) regulates the various crypto transactions in the sections that follow.
In general, there are tax repercussions that could lead to tax liability when virtual currencies are sold or exchanged, used to pay for products or services, held as investments or used for other purposes.
Because cryptocurrency is a type of virtual currency, the IRS views it as property. As a result, any transaction involving crypto counts as a taxable event and may often lead to either a capital gain or loss.
Guidelines for the US
Crypto and all digital assets are subject to taxation in the United States and will remain so regardless of how they are classified. It is evident that the regulator is becoming stricter in recently proposed legislation to increase the number of IRS agents and reporting requirements.
Since the IRS is stepping up its enforcement of laws relating to digital assets, failure to properly record, pay or follow crypto tax reporting regulations may result in interest, penalties and even criminal sanctions in the US.
How are cryptocurrency transactions taxed?
There may be capital gains or losses if you purchase, sell or exchange cryptocurrency in a non-retirement account. Depending on how long you owned the cryptocurrency before selling or exchanging it, your gain or loss may be short-term or long-term, like other investments that are subject to IRS taxation.
Any earnings are normally short-term capital gains if you owned the cryptocurrency for less than a year before spending or selling it, and these are taxed at your regular income rate. Meanwhile, any profits are usually considered long-term capital gains if you kept the cryptocurrency for longer than a year and they are taxable at a rate of up to 20 per cent.
Capital gains: long-term vs. short-term
Long-term capital gains are taxed more favourably than short-term capital gains. The constant buying and selling of many cryptocurrency traders only results in short-term financial gains, increasing their tax liability.
2022 Short-Term Capital Gains Tax Rates
|Single||$0 – $10,275||$10,276 – $41,775||$41,776 – $89,075||$89,076 – $170,050||$170,051 – $215,950||$215,951 – $539,900||$539,900+|
|Married Filing Jointly||$0 – $20,550||$20,551 – $83,550||$83,551 – $178,150||$178,151 – $340,100||$340,101 – $431,900||$431,901 – $647,850||$647,850+|
|Married Filing Separately||$0 – $10,275||$10,276 – $41,775||$41,776 – $89,075||$89,076 – $170,050||$170,051 – $215,950||$215,951 – $323,925||$323,925+|
|Head of Household||$0 – $14,650||$14,651 – $55,900||$55,901 – $89,050||$89,051 – $170,050||$170,051 – $215,950||$215,951 – $539,900||$539,900+|
Source: Internal Revenue Service
2022 Long-Term Capital Gains Tax Rates
|Single||$0 – $41,675||$41,676 – $459,750||$459,750+|
|Married Filing Jointly||$0 – $83,350||$83,351 – $517,200||$517,200+|
|Married Filing Separately||$0 – $41,675||$41,676 – $258,600||$258,600+|
|Head of Household||$0 – $55,800||$55,801 – $488,500||$488,500+|
Source: Internal Revenue Service
Note: Depending on where you live, you may need to pay additional state capital gains taxes. While some states also impose capital gains taxes, others do not tax them or treat them favourably. There are no income taxes and, hence, no capital gains taxes in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Do tax-free crypto transactions exist?
Depending on the transaction, the account you use for transactions, your income and filing status, you may be able to make tax-free cryptocurrency transfers. Moreover, even if the value of your cryptocurrency increases over time, purchasing it does not result in a taxable event. Before you decide to sell or exchange the cryptocurrency, tax consequences are unlikely to occur.
|Taxable crypto events||Non-taxable crypto events|
|Selling cryptocurrency for fiat money||Purchasing cryptocurrencies using fiat money|
|Trading one cryptocurrency for another||Making a cryptocurrency donation to an organisation that is exempt from taxes|
|Making purchases with cryptocurrencies||Gifting cryptocurrency to anyone for up to $15,000|
|Trading, buying or selling NFTs||Making a cryptocurrency transfer between your personal wallets|
|Using fiat currency to purchase an NFT|
Tracking your crypto transactions
As interest in these virtual currencies rises, the IRS is toughening its enforcement of tax reporting for crypto transactions and/or use in the US. You must therefore keep a record of your cryptocurrency-related activities and submit this data on the proper crypto tax forms to the authorities.
The US taxman only offers general guidance on the documentation you must maintain for crypto tax reporting purposes. Records of any purchases, sales or exchanges of virtual currency, as well as the fair market value of your virtual money, are just a couple of the examples the agency provides. The agency released additional instructions in October 2019 on crypto tax reporting in the US.
It is usually simple to track or create reports about your transactions if you keep your virtual currency in your account on the exchange from where you purchased it. However, you’ll need to be more vigilant in your tracking if you switch between private wallets or have cryptocurrency stored in several locations.
You can keep track of each of these transactions with the use of cryptocurrency tax software, ensuring you have a comprehensive record of activities to report when it’s time to prepare your taxes. The software allows you to import cryptocurrency transactions into your online tax software by integrating with a few virtual currency brokers, digital wallets and other crypto platforms. This can involve cryptocurrency trades as well as transactions when the virtual currency is used to pay for products and services.
If you are dealing with large amounts of cryptoassets, you can also explore partnering with a crypto fund administrator, like Bolder Group, who can assist you in your tax reporting obligations in the US.
IRS tracking of crypto activity
The IRS may still be able to track your crypto activity despite the anonymity of cryptocurrencies. For instance, if you trade on a cryptocurrency exchange that sends the IRS a report of your trades via Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, they will be a reporting entity for you.
Additionally, the IRS uses blockchain analytics tools to track the crypto activity of digital wallets and link it to specific people when they think tax evasion or money laundering is taking place. So, to avoid any illegal activities, it is necessary that you comply with US reporting requirements and file any crypto-related transactions on your tax return.
Reporting of crypto transactions in the US
A sell or exchange occurs when you do a cryptocurrency transaction through a brokerage or paying with these digital currencies. In turn, you must record the specifics of your cryptocurrency sales, including when and for how much you paid for it. Form 8949, Schedule D and Form 1040 are frequently used in reporting crypto taxes in the US.
Working with Bolder Group
You may easily comply with IRS rules by working with a tax specialist and crypto fund administrator like Bolder Group. Our team consists of experts who understand US tax laws concerning virtual currencies and disclosing income and losses from cryptocurrencies. We can help you engage in complex crypto operations and assist you with your tax liabilities.
Connect with our US offices in New York and Florida so we can assist you in your crypto tax reporting concerns.