Cryptocurrency has become increasingly popular in recent years, and it is no surprise that the IRS is taking a closer look at how to tax cryptocurrency income. In this blog, we will provide a comprehensive guide to the impact of IRS taxation on cryptocurrency income.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptocurrency operates independently of a central bank, verifying transactions through a public ledger known as the blockchain. If you don’t know much about taxation on crypto tax, you can look for a tax professional (like a tax accountant or lawyer).
What is the IRS’s Stance on Cryptocurrency?
The IRS views cryptocurrency as property for tax purposes. This means that cryptocurrency income is taxed like any other property income, such as stock sales or real estate.
What Types of Cryptocurrency Income are Taxable?
The following types of cryptocurrency income are taxable:
- Mining: Miners are rewarded with cryptocurrency for verifying transactions on the blockchain.
- Trading: The sale of cryptocurrency for a profit is taxed as capital gains. Get a professional tax person (like the best IRS lawyers) to know more.
- Staking: Staking is the process of holding cryptocurrency in a wallet to support the network and receive rewards in the form of cryptocurrency.
- Airdrops: Airdrops are a marketing tool used to distribute cryptocurrency to many individuals. Airdrops are taxable income.
Calculating Taxable Cryptocurrency Income
To calculate taxable cryptocurrency income, you will need to determine the cryptocurrency’s fair market value at the time of the transaction. This is the price the cryptocurrency was sold for in U.S. dollars.
Capital Gains Tax
Capital gains tax is a tax on the profit from selling a capital asset, such as stock or cryptocurrency. The tax rate for capital gains varies depending on how long the investment was held and the taxpayer’s tax bracket. Visit a professional tax expert (including an IRS tax lawyer in San Diego) for help.
Short-Term Capital Gains Tax
Short-term capital gains are taxed as ordinary income, and the tax rate is based on the taxpayer’s tax bracket.
Long-Term Capital Gains Tax
Long-term capital gains are taxed at a lower rate than short-term capital gains. The tax rate for long-term capital gains varies depending on the taxpayer’s tax bracket.
Filing Cryptocurrency Taxes
To report cryptocurrency income on your tax return, you must file Form 1040, Schedule 1, and attach Form 8949, Sales and Other Dispositions of Capital Assets.
Conclusion
Cryptocurrency has become an increasingly popular form of investment, and the IRS is taking a closer look at how to tax cryptocurrency income. Cryptocurrency is viewed as property for tax purposes, and the following types of income from cryptocurrencies are taxable: mining, trading, staking, and airdrops. To calculate the income, you will need to determine the cryptocurrency’s fair market value at the time of the transaction.
Capital gains tax is a tax on the profit from selling a capital asset, such as stock or cryptocurrency. The tax rate for capital gains varies depending on how long the investment was held and the taxpayer’s tax bracket. To report cryptocurrency income on your tax return, you must file Form 1040, Schedule 1, and attach Form 8949, Sales and Other Dispositions of Capital Assets.
