There are two major reasons that forced the IRS on cryptocurrency: (1) trading the cryptocurrencies as a taxable event, (2) converting the cash into virtual currency to launder money.
These are two things that forced the IRS to release the new guidance on taxation and reporting when sold, purchased, and crypto trading – leaving some grey areas behind.
Cryptocurrency: Buying and Selling of Crypto
As of 2014, the IRS had issued new guidelines that were set forth by the IRS on the taxation of virtual currencies.
These cryptocurrencies are treated as properties with an application of the principles of general tax that apply to property transactions during transactions via these virtual currencies. Treating virtual currencies as “property” includes extensive record-keeping rules that are imposed with significant taxes.
In simpler words, the IRS now treats the income or gains produced from the sale of cryptocurrencies as a capital asset that is subjected to either short or long-term capital gains tax rates, provided the asset is held for 12+ months.
If it does, the asset is taxed at either 15% or 20%. This is based on the adjusted gross income. Adding to this, the IRS also increased the percentage of the long-term capital gain for taxpayers in higher-income cryptocurrency tax brackets. This may also be applicable for an additional 3.8% of NIIT, given a taxpayer’s adjusted gross income level; applied to both, short and long-term virtual currency.
Cryptocurrency: Tax Rate for Crypto Capital Gains
For the purpose of capital gain tax treatment, there are general accounting and tax principles applied to crypto. Nevertheless, on the other hand, a few activities – like mining – can also be subjected to the ordinary tax rate treatment.
Additionally, if you end up receiving cryptocurrency compensation from services, then it could be subject to employment and/or self-employment taxes that are similar to the other compensatory payments that you otherwise receive.
Cryptocurrency Transactions: What Transactions Can Be Taxed?
To help you understand better, the transactions that can be taxed if there is:
- Exchange of cryptocurrency for any other cryptocurrency
- Cryptocurrency mining
- Payment of goods and services using cryptocurrency
- Hard forks
- Split chains
- Donating any kind of cryptocurrency
- DEFI or Decentralized Finance
IRS Enforcement in the USA:
As per the recent announcement, President Biden implied that his administration would allocate around $80 billion in funding in the next decade. This is to build a dedicated IRS task force that can be focused on virtual cryptocurrency transaction compliance and reporting.
One can expect a push for crypto exchanges that would not require reporting any information to the customers to use to report along the brokerage firm lines.
As of May 20, 2021; the US Treasury Department also announced that the businesses, exchanges, and individuals must report their total amount of crypto transactions to the IRS for more than $10,000 during a tax year.
These two announcements made it clear that the future of crypto might see a crackdown in reporting, IRS audits, and stiffer penalties through which the Biden administration believes could raise $700 billion in the next decade.
To Conclude: When To Consult a Tax Professional Regarding Your Cryptocurrency?
Here are a few incidences when you must make sure to consult a tax professional:
- In case you realized that you would like to report or could have reported the cryptocurrency transactions in the past year, then you must consider reaching out to the tax professional or a CPA.
- If you miss out on the capital losses which could be carried forward in order to offset capital gains in the future.
- If the transaction of crypto is quite frequent or substantial, then you must seek a professional
- If you are a person or handle a business that trades a lot in cryptocurrency. Here, it could get harder to track the tax basis.
It’s a good practice to have a conversation or seek assistance well ahead of time in order to be proactive and not reactive. Doing so will help save a lot of time for you, as well as benefit the crypto tex professional with ample space to work in.
FAQs: Understanding Cryptocurrency Tax Implications: Your Quick Guide!
- Why Can’t Cryptocurrency Exchanges Provide Accurate Tax Forms?
The reason why cryptocurrency exchanges can not provide tax reporting information is that:
- They might not be simply required to
- Are considered as outside the requirements of the traditional reporting brokerage
Where some crypto exchanges are proactive, providing information reporting information on the crypto transactions such as Coinbase and Robinhood, others don’t.
- What does the record-keeping purpose include?
In record-keeping, an individual’s cost basis is the amount they pay for the cryptocurrency whose spread is taxable when used or sold, assuming appreciated purchase value. On the other hand, if the value is declined since the purchase, then it is considered as a capital loss.
- What are the transactions that can be taxed?
To help you understand better, the transactions that can be taxed if there is:
- Exchange of cryptocurrency for any other cryptocurrency
- Cryptocurrency mining
- Payment of goods and services using cryptocurrency
- Hard forks
- Split chains
- Donating any kind of cryptocurrency
- DEFI or Decentralized Finance
