How Is Crypto Taxed? Here's What You Need To Know Now

By Yashovardhan Sharma

cryptocurrency with TAX wording in front of calculator

Cryptocurrency, the decentralized digital asset, has been making headlines recently. But the question remains, how is it taxed? This blog post will shed some light on the taxation of cryptocurrency and provide a comprehensive guide to help you understand the different tax implications and strategies you need to know.

 

Introduction to Cryptocurrency Taxation

 

Crypto taxation is a complex and ever-evolving topic. With the rise of digital assets and currencies, governments around the world have been scrambling to create regulations and guidelines for taxation. In the United States, the IRS has issued guidelines on how to report cryptocurrency transactions and how to calculate taxes owed on them. Depending on the country you live in, the laws and regulations on taxation may vary.

 

How Is Crypto Taxed?

 

Hand holding a bitcoin cryptocurrency taxation

 

In the United States, the IRS has declared that cryptocurrencies are property for tax purposes. This means that all cryptocurrency transactions must be reported on an individual's taxes as capital gains or losses. This includes buying, selling, trading, and gifting cryptocurrency. The tax rate for capital gains depends on the individual's income and how long the cryptocurrency was held. If it was held for one year or less, it is taxed as a short-term gain, and if it was held for more than one year, it is taxed as a long-term gain. You must factor this in while managing risk as a cryptocurrency trader.

 

Mining is the process of creating new cryptocurrency tokens, and it can be quite profitable. In the United States, all cryptocurrency mined is taxed as income, regardless of whether it is sold or held. The amount of income is determined by the fair market value of the cryptocurrency at the time it was mined.

 

Implications of Gifting Crypto

 

Gifting cryptocurrency can be a great way to share your wealth with family and friends. In the United States, the IRS considers gifting cryptocurrency to be a taxable event. The giver of the crypto is responsible for reporting the fair market value of the crypto on the date of the gift and paying the associated taxes. The recipient of the gift does not have to report the gift or pay taxes on it.

 

The Tax of Trading Crypto

 

Bitcoin digital currency  trade

 

Trading cryptocurrency can be a great way to make profits. In the United States, all profits and losses from trading cryptocurrency are considered capital gains or losses and must be reported on an individual's taxes. The amount of the gain or loss is calculated by subtracting the cost basis (the amount paid for the cryptocurrency) from the sale price of the cryptocurrency.

 

Using Crypto to Make Purchases

 

Using cryptocurrency to make purchases can be an easy and convenient way to pay. In the United States, the cryptocurrency used to make purchases is considered a sale and must be reported on an individual's taxes. The amount of the gain or loss is determined by subtracting the cost basis (the amount paid for the crypto) from the sale price of the crypto.

 

Earning Digital Crypto

 

Earning cryptocurrency, such as through rewards or airdrops, can be a great way to increase your crypto holdings. In the United States, all cryptocurrency earned is taxed as income and must be reported on an individual's taxes. The amount of income is determined by the fair market value of the cryptocurrency at the time it was earned.

 

Forks & Airdrops

 

Forks and airdrops are two popular ways to receive free cryptocurrency tokens. In the United States, forks and airdrops are both considered taxable events and must be reported on an individual's taxes. The amount of the gain or loss is determined by subtracting the cost basis (the amount paid for the crypto) from the fair market value of the crypto at the time of the fork or airdrop.

 

Tax Implications of Staking

 

Staking is a process of locking up your cryptocurrency in order to receive rewards. It can be a great way to increase your crypto holdings. In the United States, all rewards received from staking are considered taxable income and must be reported on an individual's taxes. The amount of income is determined by the fair market value of the cryptocurrency at the time it was staked.

 

Using Crypto as Payment for Services

 

Using cryptocurrency as payment for services can be a great way to pay for goods and services. In the United States, any cryptocurrency used as payment for services is considered a sale and must be reported on an individual's taxes. The amount of the gain or loss is determined by subtracting the cost basis (the amount paid for the cryptocurrency) from the sale price of the cryptocurrency.

 

Donating Digital Crypto

 

Businessman giving golden bitcoin to another human

 

Donating cryptocurrency can be a great way to share your wealth with charitable organizations. In the United States, the IRS considers donating cryptocurrency to be a taxable event. The donor of the crypto is responsible for reporting the fair market value of the crypto on the date of the donation and paying the associated taxes. The recipient of the donation does not have to report the donation or pay taxes on it.

 

Strategies for Minimizing Your Crypto Tax Liability

 

Minimizing your crypto tax liability is an important part of managing your cryptocurrency investments. There are a few strategies you can use to reduce your taxes, such as:

- Holding onto your cryptocurrency for more than one year to take advantage of the lower long-term capital gains tax rate.

- Trading frequently to take advantage of tax loss harvesting.

- Donating crypto to a charitable organization to receive a tax deduction.

- Exchanging one type of crypto for another to take advantage of the tax-free like-kind exchange rule.

 

Conclusion

 

Cryptocurrency has many benefits. But crypto taxation is a complex and ever-evolving topic. The IRS has issued guidelines on how to report cryptocurrency transactions and how to calculate taxes owed on them. It is important to understand the tax implications of buying, selling, trading, mining, earning, staking, gifting, and donating cryptocurrency. Additionally, there are strategies you can use to minimize your crypto tax liability.