Crypto and Taxes: What You Need to Know
As the popularity of digital assets continues to grow, it has become increasingly important to understand the tax implications of investing in and using cryptocurrencies.
The Internal Revenue Service (IRS) issued guidance on the taxation of cryptocurrencies in 2014, and failing to comply with these regulations can result in serious penalties. Depending on what you do, your crypto could either be taxed as an asset or as income.
This article will explore the basics of crypto and taxes, including what you need to know about reporting cryptocurrency transactions on your tax return.
What Is Cryptocurrency?
Before we delve into the tax implications of cryptocurrency, let us first understand what exactly “cryptocurrency” is. Crypto is a digital or virtual currency that uses cryptography for security. These assets operate independently of a central bank and can be used to purchase goods and services, invest, or trade.
Since 2009, when Bitcoin (BTC), the first and most well-known cryptocurrency, was created, thousands of other cryptocurrencies, including Ethereum (ETH), Ripple (XRP), and Melega (MARCO), among others, have been developed to focus on different use cases.
How Is Cryptocurrency Taxed?
Cryptocurrency is treated as property for tax purposes, meaning that it is subject to capital gains tax. This means that any profit or loss from the sale of cryptocurrency is taxable. If you hold cryptocurrency for more than a year before selling it, you will be subject to long-term capital gains tax rates, which are generally lower than short-term rates.
According to the IRS, virtual currencies are regarded as property, and typical tax laws that apply to property transactions also apply to transactions using virtual currency:
For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
Taxable Events in Cryptocurrency
- Trading cryptocurrency for fiat currency — (capital gains)
- Trading one cryptocurrency for another — (capital gains)
- Cryptocurrency mining — (income)
- Crypto airdrops — (income)
- Using or receiving cryptocurrency in exchange for goods or services — (capital gains)
- Selling cryptocurrency for fiat currency — (capital gains)
- Cryptocurrency and retirement accounts — (income)
Reporting Cryptocurrency Transactions
If you have bought, sold, or traded cryptocurrency, you must report these transactions on your tax return. The IRS has been cracking down on cryptocurrency tax evasion, so it is important to ensure that you are in compliance with the regulations.
When you buy cryptocurrency, you are not required to report it on your tax return. However, you must report the sale of cryptocurrency on your tax return, as well as any income earned from cryptocurrency mining, staking, or airdrops.
Consequently, it is important to keep accurate records of all cryptocurrency transactions, including the date and amount of the transaction, the value of the cryptocurrency at the time of the transaction, and any fees paid. This information will be necessary when calculating your capital gains or losses for tax purposes.
Crypto and Taxes for Businesses
If you own a business that accepts cryptocurrency as payment, you are required to report these payments on your tax return as income. The value of the cryptocurrency at the time of the payment must be recorded, and the income is subject to self-employment tax.
The value of the cryptocurrency on the day you received it is considered your income. For example, if you received one BTC as payment for a service and the value of one bitcoin was $50,000 on that day, you would need to report $50,000 as income on your tax return.
Moreover, if you pay employees or contractors in cryptocurrency, this is considered a taxable event, and you must report it on Form W-2 or Form 1099.
Crypto and Taxes for Investors
If you invest in cryptocurrency, you are subject to capital gains tax on any profits from the sale of cryptocurrency. It is important to keep track of your cost basis, which is the original purchase price of the cryptocurrency, as well as any fees paid.
If you trade cryptocurrencies, you may be subject to both capital gains tax and ordinary income tax. As earlier noted, if you hold cryptocurrency for less than a year before selling it, you will be subject to short-term capital gains tax rates, which are typically higher than long-term rates.
Crypto and Taxes for Miners
Crypto miners are subject to crypto taxes, therefore they must report the income earned on their tax return. This income is subject to self-employment tax and is calculated based on the fair market value of the cryptocurrency at the time it is mined.
Additionally, if you receive cryptocurrency as a reward for staking or participating in airdrops, this income is also subject to tax. The fair market value of the cryptocurrency at the time it is received must be recorded.
Crypto and Taxes for Traders
Taxes for crypto traders can be a bit complicated because they may have several taxable events throughout the year. However, any gains or losses resulting from the sale or exchange of cryptocurrency are subject to capital gains tax.
The gains or losses on their tax return are calculated based on the fair market value of the cryptocurrency at the time of the transaction and the cost basis of the coin. The cost basis is the amount that the trader paid for the cryptocurrency, including any fees or commissions. It is important to keep track of the cost basis for each transaction, as it will be used to calculate the gain or loss.
Crypto traders who have a net capital gain at the end of the year may also be subject to the Net Investment Income Tax (NIIT), which is an additional 3.8% tax on investment income. The NIIT applies to individuals who have a modified adjusted gross income above a certain threshold, which is $200,000 for single filers and $250,000 for married couples filing jointly.
Calculating taxes on cryptocurrency trades might be a very challenging task, especially for traders who initiate numerous trades every day. That is why Binance recently rolled out a product dubbed “Binance Tax” that offers an easy and user-friendly tax assistant, helping traders estimate their tax liability for transactions made on the Binance exchange.
Closing Thoughts
Generally, cryptocurrencies are regarded as property that is equally taxable as other forms of property. It is important for crypto users and traders to keep accurate records of all their transactions throughout the year, including the cost basis and fair market value of each transaction.
They should also consult with a tax professional to ensure that they are complying with all tax laws and regulations related to cryptocurrency trading.
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Learn More About the Melega Ecosystem
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