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- 1 Tax compliance on crypto trading as per the Internal revenue service (IRS) guidelines of the US Federal government
- 2 Major events where the money gained from crypto transactions is taxable
Even after being built on a decentralized system, crypto transactions have come under the radar of the IRS since 2014. Much like stocks, cryptocurrency is regarded as a property or asset by the US government, and hence, is subject to IRS rules surrounding capital gains and losses. Depending on the way users make use of crypto, transactions that can prompt the payment of taxes are considered as taxable events.
Top 8 Cryptocurrency Taxable Events
- IRS regards the purchase of cryptocurrency as an investment, however, selling it for fiat currency (e.g., Dollars, Euros, Pesos) is classified as a taxable event. Taxes are owed if the price at which the assets are sold exceeds their principal value while in the case of capital loss, the IRS allows the investors to deduct that loss from the taxes. Tax rates incurred on the crypto vary based on how long the user holds it. For instance, assets that were held for less than a year qualify for the short-term capital gains and losses tax rates. In the case of cryptos possessed for more than one year, profits or losses made from their sale are subject to the long-term capital tax rate.
- Swapping one digital currency with another in the crypto world is another taxable event. The profits and losses suffered by both parties in the trading of cryptos, such as exchanging dogecoin with bitcoin, should be reported to the IRS.
- Purchasing goods and services with crypto is becoming fairly common for people and businesses. However, this is also a taxable event as per IRS. While making a payment with cryptocurrency, the gains or losses made from the transaction are dictated by the fair market value of that currency at the time of the transaction and should be reported as such.
- During the cryptocurrency mining process, miners receive tokens as rewards in exchange of verifying blocks. If the miner works individually, the earnings received are taxable as self-employment (or ordinary) income. Contrastingly, if crypto mining is done as a business enterprise, the miner is still qualified for a self-employment tax with an added relief of deducting expenses that were spent on necessary business operations like electricity, mining hardware, and repairs.
- Staking cryptocurrency is also deemed taxable by the IRS. Staking involves locking money on the exchange platform for a certain period of time and receiving additional coins in exchange as a passive income. Taxes on these rewards are based on the fair market value of the coins at the time they are received.
- Receiving cryptos from the hard fork of a blockchain also falls into the category of taxable events. During a hard fork the main blockchain diverges into two chains owing to a radical change in the network’s protocols. Any tokens of the new or existing crypto received by the nodes during this event should be reported as income at the time of tax filing.
- Oftentimes, newly launched projects with new cryptocurrencies distribute free tokens in the wallets of their regular users. This is called ‘crypto airdrop’ and can be viewed as a marketing tactic or a gift to their loyal customers. Either way, these tokens are considered as taxable income and the amount of earned money should be reported while filing taxes.
- Gifting cryptocurrency can also constitute a taxable event given the amount of the gift exceeds $16,000 as per IRS guidelines. Moreover, in a case where the cryptocurrency is gifted in exchange of goods and services, the gift needs to be reported for taxes.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
