Cryptocurrency Industry News

With the ultimate rise of the cryptocurrencies like Bitcoin, multiple crypto traders ended up questioning the crypto taxes and effects. While we are well aware of the fact that crypto, although being a cryptocurrency, is not treated as one, but is seen as a property that is a tax asset, especially in the eyes of the IRS, or Internal Revenue Service. With the stepping up their enforcement efforts, all those who help the currency are expected to be well informed and not run afoul of the law when it comes to taxes. Although this might sound daunting to an individual, it is a rather easy term of understanding, depending upon how the IRS treats the cryptocurrency. This is why it is extremely necessary for you to be well aware of the transaction with cryptocurrencies and know of the law and the taxation of the same. To help you simplify your work, we have curated this blog post that will help you answer - how is cryptocurrency taxed through the 7 most important things that you must know about crypto. So, let’s get started! 7 Things You Need To Know About The Cryptocurrency Tax! Listed below are the top 7 things you must know about cryptocurrency taxes to help stay on the best side of the law. 1. Owned Or Used Cryptocurrency? As per the 2021 tax return, you are expected to state whether or not you’ve transacted in cryptocurrency. You will be asked if you owned or used the crypto in the 1040 form. Here, you must answer correctly or you are on the hook of lying to the IRS that could cause you to go through legal jeopardy. 2.You Do Not Escape Being Taxed If Didn’t Receive 1099 You can expect to receive a 1099 form from the bank or the brokerage, reporting the income received in the year. But, this is not the case with cryptocurrency. This is because the IRS doesn’t get great reports from Coinbase and the other exchanges. However, in November 2021, the law is expected to require great tax reporting for the ones in the industry, starting from January 1, 2023. Here, they will require the brokers, that is, anyone who shifts their digital assets for another including miners and crypto wallets, and report the same to IRS on a 1099 or a similar expected form. In short words, the lack of the 1099 form will not let you escape any form of tax liability, meaning, you’d still have to report the transaction. By looking at it, it isn’t a bad deal after all, for instance, if the transaction happens to be a capital loss, you will be able to deduct the same on your return and also reduce the taxable income. 3.Crypto Exposes To The Potential Tax Liability As a popular misconception - if you only “use” and not “trade” then the cryptocurrency is not liable for taxes. To break the ice, this is actually not true! Crypto is liable for tax at any time you choose to exchange, sell, mine, or use the crypto. The act of the said creates liability, that is if the price is realized to be greater than the cost basis in the cryptocurrency. So, if you happen to receive more value as compared to what you put in, then you’ve got yourself a tax liability. On the other hand, there is a chance of a loss too, that is if the value of goods, real currency, or services is below the cost basis in the cryptocurrency. Irrespective of the case, you must be well aware of your cost basis to help make your calculation. 4.Gains Are Equal To The Regular Capital Gains In the eyes of the IRS, the gains on cryptocurrency are similar to any kind of capital gain. This means you’d pay the ordinary tax rates on the short-term capital gains for the assets held for less than a year. On the other hand, the assets held for longer, that is for more than a year, you must pay the long-term capital gains tax. 5.Crypto Miners Could Be Treated Differently If you mine crypto as a business, then you may be free to enjoy and deduct the expenses similar to how the typical business would. The only catch here is that you must run a trade or business in order to qualify for the same. You cannot be operating the mining rig as a part of your hobby and also expect to enjoy the deductions as any other business. 6.A Crypto Gift Is Similar To Any Other Gift If you’ve received or gifted a crypto gift to anyone, it will be treated similarly to any other gift that you might receive. This means, it is liable or subjected to a gift tax, that is if it exceeds $15,000 this year or $16,000 in 2022. When it comes to selling the gift, the cost basis will remain the same as the cost basis of the giver. Here’s a tip, if you want to do away with the gift tax, even if it is over the annual threshold, you could take advantage of the lifetime exemption. 7.Inherited Crypto Is Similar To Any Other Inherited Asset Any form of inherited cryptocurrency is treated just like any other capital asset, passed from one generation to another. This can also be subjected to the estate taxes, that is if the estate exceeds the threshold of $11.7 million in 2021 and $12.06 million in 2022. To Conclude: We hope this blog post has helped answer your questions on crypto taxes through the 7 major points mentioned above. To be on the safer end and on the “good” side of the IRS, we recommend keeping a close eye on the transactions and reporting the same, accordingly. FAQ How to report Bitcoin on taxes? Depending on the kind of transaction made, the type of revenue—ordinary income or capital gain—must be stated under the relevant title of the associated columns of the form. How is a virtual cryptocurrency treated for tax? A transaction made via virtual crypto is taxable under the eye of the law, similar to any other property. This is why the transaction must be reported to the IRS. Are crypto gains equal to any other gain? In the eyes of the IRS, the gains on cryptocurrency are similar to any kind of capital gain. This means you’d pay the ordinary tax rates on the short-term capital gains for the assets held for less than a year. On the other hand, the assets held for longer, that is for more than a year, you must pay the long-term capital gains tax. Please note that the article is provided with an educational purpose. InvestingCube's staff are not qualified to provide tax advice. Please ensure to speak with a qualified tax advisor before making any decisions.