Cryptocurrency taxation laws vary from one country to another. In this article, readers will learn about the crypto taxation rules that are enforced by the IRS within the United States of America.
What is Crypto Tax?
Cryptocurrencies are treated as capital assets by the Internal Revenue Service or IRS. Therefore, digital assets are subjected to capital gains and income taxes.
Capital gains are a type of tax that is a percentage paid to the government from the sales of an asset such as securities or property etc. Income taxes are levied on the remuneration a worker can earn as a form of compensation for their services.
What are Taxable Events?
Taxable events are cryptocurrency transactions that qualify crypto investors to pay taxes to the government. Two main types of taxable events can result in levying either income or capital gains tax on cryptocurrency investors. The details for both are shared as under:
Income Taxable Events
Receiving Cryptocurrencies as Salary
If a person received their salary in the form of cryptocurrencies they are going to be taxed by the government following their tax bracket.
Selling in Exchange for Crypto
Online merchants and other parties who sell goods or services in exchange for cryptocurrencies are liable to report their earnings to the IRS.
PoW blockchain miners earn newly minted cryptocurrencies issued by the blockchain as revenue. Therefore, they are liable to pay income taxes based on the market value of the cryptocurrency at the time of its issuance.
Some blockchains allow their consumers to lock their cryptocurrency reserves to earn staking rewards or yields. Since these rewards are in the form of cryptocurrencies they are also treated as income taxable events.
Miscellaneous Crypto Income
Some cryptocurrencies issue rewards for holding them such as USD Coin. Therefore, the holders of such currencies must also pay income taxes.
Hard Fork Crypto Earnings
There are some cases when blockchain split after a hard fork event. If the users intend to withdraw their crypto tokens from the listed exchange platform they can be taxed. For further details, here is the IRS website link.
Airdrops are crypto giveaways that are organized by a blockchain project as part of their marketing efforts or promotion. However, the receivers of these crypto giveaways are taxed following the market value of the cryptocurrencies at the time of their distribution.
Crypto Rewards, Gifts and Incentives
There are several reasons that people can receive cryptocurrencies for free such as a gift or a sample etc. However, these crypto presents are taxed for the receiver.
Capital Gains Taxable Events
Converting Crypto into Cash
When a cryptocurrency investor owns and sells their cryptocurrency reserve in exchange for other fiat currencies they are liable to pay capital gains taxes. However, if the investor sells for losses they can leverage a tax-deductible.
Exchanging One Cryptocurrency with Another
Capital gains taxes also apply to the exchange of cryptocurrencies from one variant to another. For example, some investors like to convert their profits or losses into stablecoins. In this case, IRS also taxes the crypto investor for capital gains.
Buying with Crypto
Investors can use their cryptocurrencies to purchase goods or services online. However, IRS treats this as a crypto sales contract, and thus the cryptocurrency sales and taxes it as capital gains.
Cryptocurrency investors have to pay lesser taxes if they hold their cryptocurrencies for more than one year and vice versa. In case of losses crypto investors may apply for a tax deduction of up to $3000 within one year and if the losses exceed, they are shifted to the next year.