The IRS considers most cryptocurrencies as convertible virtual currencies, meaning they can be used as actual money and are subject to taxation. However, the taxation of cryptocurrency is dependent on various factors that individuals need to understand to ensure compliance with tax requirements.
Whether a person owes taxes on their cryptocurrency activities depends on the specific circumstances, making it crucial for cryptocurrency owners to be aware of when their transactions are taxable. This awareness helps to avoid any unexpected tax liabilities from the IRS.
If you are part of the over 10% of Americans involved in cryptocurrency trading, it’s important to understand how these transactions and other cryptocurrency activities can impact your tax obligations.
Crypto Tax Rates 2023
The IRS has updated the tax brackets for 2022 to account for inflation. Here are the long-term cryptocurrency tax rates applicable for the 2022 tax return filing.
What is Capital Gains Tax in Crypto?
Investors who purchase cryptocurrencies and later sell them for a profit may be subject to capital gains taxes. The amount they initially paid to acquire the cryptocurrency, known as the cost basis, is used to calculate the capital gains.
The IRS taxes these profits based on the investor’s income level and the duration for which the cryptocurrency was held. Holding the cryptocurrency for over a year before selling can result in a more favorable tax rate, and some investors may sell at a loss to reduce their tax liabilities.
What is Income Tax in Crypto?
Individuals who receive cryptocurrency as income for provided services or through specific activities are required to report this as part of their income and pay taxes on it. This is regardless of the fluctuations in the cryptocurrency’s value over time, and individuals receiving $500 or more in cryptocurrency for services are obligated to file a tax return.
What are Taxable as Capital Gain Cryptocurrency Events?
Various cryptocurrency-related events, such as cashing out cryptocurrency for fiat, can result in taxable capital gains. Additionally, converting one cryptocurrency to another may also have tax implications, and understanding these events is crucial for managing tax obligations effectively.
The IRS considers cryptocurrency to be a form of property, not currency, and this perspective is crucial when it comes to taxes. This means that any events involving the use or exchange of cryptocurrency are subject to tax, including transactions where one cryptocurrency is converted into another.
For instance, if you exchange Bitcoin for Ethereum, you are required to report the transaction and pay any relevant capital gains taxes.
Despite the fact that some businesses accept cryptocurrency as payment, using it as a medium of exchange can result in capital gains taxes. This means that using cryptocurrency to make purchases is treated the same as selling it for fiat money.
Therefore, the tax implications of using cryptocurrency for transactions are similar to those of selling it for traditional currency. This is because, when spending cryptocurrency instead of cash, the IRS regulates capital gains rates for both short- and long-term investments. Holding the asset for more than a year may result in more favorable tax treatment.
Income tax events related to cryptocurrency include receiving cryptocurrency as a form of payment, mining or staking cryptocurrency, earning cryptocurrency through play-to-earn games, earning income from holding certain types of cryptocurrencies (often referred to as interest), receiving cryptocurrency through an airdrop, and participating in a hard fork of a cryptocurrency.
All of these events are considered taxable income by the IRS, and the fair market value of the cryptocurrency must be reported at the time of receipt. It is important to note that even small amounts of cryptocurrency received through airdrops or hard forks must be reported to the IRS.
In essence, the IRS treats cryptocurrency transactions as taxable events, and it’s essential to consider the tax implications of using cryptocurrency for various purposes.This produces regular earnings.
Whether you receive a 1099 form disclosing the transaction, it counts as taxable income on your tax return and needs to be reported to the IRS.
What are Non-Taxable Cryptocurrency Events
Capital gains taxes will apply if you sell Bitcoin or use it as money. Sometimes, you can avoid depreciation by selling and paying taxes. The cryptocurrency market is difficult to anticipate, but cutting your taxes is simpler. These techniques can help you reduce your cryptocurrency taxes.
Purchase Crypto With USD/Fiat
When you use another coin to buy a crypto, the previous holding will have capital gains. Purchasing crypto with fiat money is not taxed. Therefore, holding onto your cryptocurrency is preferable to selling it in order to acquire another one. If you wish to diversify, you can invest money from your next paychecks in your next crypto.
Buy Crypto in an IRA
The Internal Revenue Service (IRS) does not recognize any particular Individual Retirement Account (IRA) created for crypto. As a result, when you hear the terms “cryptocurrency IRA” or “Bitcoin IRA,” they refer o an IRA that has digital currencies as part of its assets.
For people saving for retirement and investing, IRAs provide tax benefits. With a Roth IRA, you can invest and never pay capital gains tax. With just a 1% transaction fee and no additional fees, iTrustCapital enables you to build a cryptocurrency IRA account.
Hold Crypto
If you keep your cryptocurrency, you’ll never have to pay taxes on it. You can wait to sell until you are ready and let the capital gains accumulate. You can avoid paying capital gains taxes by moving to Puerto Rico or holding off on selling your cryptocurrency until after retirement.
Cryptocurrency purchases and ownership alone are not taxed. When you sell something and the earnings are “realized,” the tax is frequently paid later.
Transfer Between Your Own Wallets and Exchanges
Since you still own the cryptocurrency after the transfer, moving it from one wallet or exchange to another is not a taxable event. Some investors inadvertently sell cryptocurrency for cash, transfer the money to a different site, and then buy cryptocurrency again. Transferring money between exchanges and wallets is simpler and won’t affect your taxes.
Most cryptocurrency gifts are tax-free. The IRS has set restrictions on how much you may gift each year ($15,000) and overall ($11.7 million) before it triggers a tax obligation. The receiver should be informed of the purchase date and cost basis. If the receiver sells the cryptocurrency you send them, they will want this information for tax purposes. Without paying taxes, you can give up to $15,000 to each recipient each year (and higher amounts to spouses).
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