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Crypto Taxes in the United States 2022: All You Need to Know!

Cryptocurrency may operate independently from traditional banking systems, but that doesn’t make it exempt from federal and state taxation in the United States. But not to worry! We’ve put together this quick guide to answer all your burning questions about crypto taxes.

The IRS (Internal Revenue Service) officially began asking about cryptocurrency on its 2019 Form 1040. This was preceded by 2014’s Notice 2014-21, 2014-16 I.R.B. 938, in which the IRS declared “the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.”

Put simply: your cryptocurrency is considered a taxable asset by the IRS, and tax collectors are increasingly sophisticated at identifying those who trade and sell it. According to CNBC, failure to report cryptocurrency holdings on Form 1040 can result in fines, penalties, and even criminal prosecution. So, in the interest of avoiding all that misery, let’s take a closer look at the rules and regulations at play.

For deeper insights into how the rest of the world is handling crypto taxes, check out the CoinText Tax Map Guide.


How are cryptocurrencies taxed in the United States?

With all the new rules surrounding cryptocurrency, it can be confusing to determine what actions are taxable. In general, it’s important to keep in mind that transactions between entities are typically taxed, like converting crypto into fiat currency (cashing out) or using your crypto as a form of payment for goods and services. 


Crypto Tax Regulation in the United States

Even conversions from one cryptocurrency to another (like Bitcoin to Ethereum) are considered taxable events. However, some events are not taxable, like simply purchasing cryptocurrency and holding it. Below is a breakdown of which tax rules apply.


Cryptocurrency Trades

You’ve probably heard of the term ‘Capital Gains Tax’ -- but what does it mean in relation to your cryptocurrency? Essentially, every time you achieve gains in crypto and realise those gains by cashing out, you’re creating a taxable event. According to Shehan Chandrasekera from Forbes: “The federal tax rate on cryptocurrency capital gains ranges from 0% to 37%. Your specific tax rate primarily depends on three factors:

1. The accounting method used for calculating gains.

2. How long you held the coins before selling (Holding period).

3. Your overall annual income (including non-crypto sources such as W-2) and tax filing status.”

Chandrasekera underscores an important point: the exact amount of tax you owe on each cryptocurrency trade varies on several factors. You’ll need to calculate the specific amount of Capital Gains Tax according to your tax bracket, the amount of time you’ve held the coin, and the method of accounting used.

Mining and Staking

In the United States, tax regulations for cryptocurrency mining and staking are differentiated for hobby and business purposes. According to Taxbit.com, hobbyist miners should file their mining gains as “other income” on Form 1040. Professional miners will head over to Schedule C of the same form (Profit or Loss from Business) and report earnings or losses there. In this case, when calculating your Capital Gains Tax, you’re allowed to subtract your Cost Basis (cost incurred from mining) from the eventual sale price.

You’re also required to report gains realised from staking cryptocurrency. If you’re unfamiliar, staking is a bit like mining but doesn’t involve any equipment to generate additional crypto. It puts your crypto to work on the blockchain and generates rewards in the meantime. But if you clear $600 worth of staking rewards you’ll have to report those earnings on Form 1099 under Miscellaneous Income.

DeFi and Airdrops

An airdrop is typically cause for celebration amongst crypto enthusiasts, but hold on...there are tax implications to consider before breaking out the champagne!

Unlike the rules surrounding transactions, the tax liability for airdrops is less established. Cointracker speculates that although there is no official IRS guidance for airdrops, the event would likely fall under what’s called the “treasure trove” doctrine which dictates that found money can be taxed. 

Early adopters of DeFi (decentralized finance) protocols like yield farming and liquidity pools may have similar questions about their tax liability. As of September of 2021, the IRS has released no official guidance pertaining to DeFi or funds accumulated from associated protocols. However, precedents set by existing guidance may end up causing a headache for those trying to sort out their tax liability. That’s because DeFi protocols utilise many different kinds of transactions related to borrowing, lending, arbitrage and accumulated interest payments. 

Bottom line: If you’re deep into DeFi, you’ll probably want a very skilled accountant working on your behalf to untangle this web of tax liability. 

NFTs

Similar to what’s discussed above, the IRS hasn’t released any specific tax guidelines about NFTs, or collectible non-fungible tokens. According to Bloomberg Tax, “NFTs are likely treated as “collectibles” under tax code Section 408(m)(2). Although not specifically defined, according to Section 408(m)(2)(A) any work of art is considered a collectible.”

Under this precedent, tax liabilities would differ between NFT sellers and NFT investors. Any funds accumulated from the sale of NFTs would be subject to regular income tax. But like your cryptocurrency transactions, any gains realized from NFT investments will be subject to Capital Gains tax. 

There’s no articulated method for reporting NFT gains or losses in the current U.S tax code. However, Bloomberg Tax recommends that creators report their income on Schedule C of form 1099. For investors, they suggest the following: “use Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses) to report dispositions of cryptocurrency to purchase NFTs and the subsequent sale of NFTs.”

How Much Tax Do You Have to Pay on Crypto?

Calculating your crypto tax liability is a matter of determining the amount of realized gain you’ve profited from. Remember, a gain is only realized when converting a crypto asset into fiat currency for a profit. Cryptocurrency that’s purchased from an exchange and simply held is not taxable... yet another incentive to HODL. 

But for everything else, calculating your tax bill isn’t as complicated as it may seem. First, you’ll need to multiply the sales prices of each crypto you’ve sold by the quantity sold. After that, subtract the original price you paid for the crypto in question. The resulting figure will represent your realised gain. 

Next, determine whether your gain will be classified as short-term or long-term. A short-term gain is considered to be one year or less while long-term is anything more than a year.

Tax Threshold

That wasn’t too difficult, right? Once you’ve determined the amount of realized gain and classified it as long or short-term, all that’s left is to estimate your taxes based on your specific income bracket. Forbes recently posted this handy guide with a chart of the 2020-2021 tax brackets for your reference. 

If your annual income is less than $9,875, you’ll be subject to a 10% tax rate on your crypto. On the opposite side of the spectrum, those making $518,401 or more will pay around 37%. Holdings classified as long-term are subject to slightly lower tax rates.

Allowable Costs

  • If you’ve sold cryptocurrency at a loss, it’s possible to report those losses and decrease your tax liability. However, you can only deduct a maximum of $3,000 per calendar year.

  • When classified as a business, cryptocurrency mining costs like equipment, utility fees, and maintenance may be written off as an expense.

  • According to Koinly, trading fees from exchanges are fully deductible, but you’ll still be taxed for transfer fees.

Other Taxes

If you’re loaded with Bitcoin and want to pass it on to future generations of your family — lucky them. But make sure to consult the IRS guide concerning Estate Tax. Your beneficiaries may be liable to pay a percentage of the amount in taxes if the estate exceeds a threshold of $11.58 million.  

How Do I Report My Crypto Taxes?

You’ll be required to report your cryptocurrency taxes via the IRS Form 8949, Schedule D, and as mentioned earlier in this article, forms 1040 Schedule 1 and 1040 Schedule C.

Record Keeping

Keeping a comprehensive set of records for all your crypto transactions will be extremely useful when the taxman comes calling. Major exchanges will typically provide you these documents upon request. Hardware wallets like Trezor also make it easy to export this information into a spreadsheet or .pdf document. 

Make sure to consult with a professional accountant due to the complexity and ever-changing nature of cryptocurrency tax liability. Now we’re all caught up on taxes! 

More information: https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies 


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