Many cryptocurrencies like Bitcoin and Ethereum rise and fall, raising tons of tax questions. The Internal Revenue Service (IRS) is implementing many laws for those holding cryptos, trading them, and making transactions to ensure they don't default on their taxes. The law is going after traders, and possible audits may happen. The IRS has specific ways of dealing with cryptocurrency.
Although cryptocurrency is known for its secrecy or anonymity, the authorities have found a way to catch up with traders, and the pattern has been a success in recent years.
The IRS places crypto among assets, imposing tax events to cash on it. You owe taxes when a trader performs a blockchain translation like a sell, exchange, or gain. For example, if you acquire a Bitcoin valued at $400 and sell it at $600, you owe the IRS taxes on $200 as a short-term capital gain. However, the IRS will use the usual tax rate if you have coins for over a year. According to your earnings, the 2022 tax rate was between 0% to 37%.
In the same way, Uncle Sam formulated taxable events for crypto holders when they gain or use digital currency. The IRS imposes capital gains and losses tax on your crypto transactions, but sometimes, you may pay income taxes. Income taxes on digital assets are up to 37%, depending on your earnings and filing status.
Here is how the IRS classifies the fate of cryptocurrency in tax.
The IRS imposes a tax on any gain or loss on your account. The transaction is simple; it happens when you buy and sell digital coins.
When you exchange a digital coin for another instead of cash, the IRS does not overlook this transaction in tax filing. The consideration of exchanging Bitcoin for Ethereum, or Litecoin, is a taxable event.
Purchasing items online with crypto is considered a taxable event. The IRS calculates their taxes using the coin's value when you gain or lose during the transaction. Regardless of the price or fraction of the currency, the result is taxable.
Earning crypto is considered income and a taxable event. The tax is based on the value of the coin at the exchange. Whether you make crypto from mining, staking, yielding accounts, or bonuses is taxable.
When a crypto company or friend gives you free coins, the value is taxable. Here are two ways it goes; when you receive coins by airdrop and hard forks. The airdrop process receives free coins from the company as a marketing campaign or strategy. On the other hand, the hard fork is a bit complicated; essentially, it is when a company divides its coin or token into two types. In essence, you have the original coin and mimic or new coin. The mimic coins can have different values. This scenario is a taxable event.
However, the IRS has non-taxable events. Here are some tax-free events.
Purchasing digital coins with fiat money
Donating to a tax-free charity or nonprofit organization
Gifting digital coins to a third party under gifting exclusion
Transferring cryptocurrency between wallets
The IRS has different methods to report your digital tax depending on how you earn or use your coin. You can use Form 894, Schedule C or D, and Form 1040. However, most crypto trading platforms do not issue tax forms, so remember to keep receipts and transaction records because they are treated as standard tax forms.
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