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Regulations for Crypto taxes in the US

By Ralph KalsiCryptocurrencyOct 20, 2022 00:52
au.investing.com/analysis/regulations-for-crypto-taxes-in-the-us-200530682
Regulations for Crypto taxes in the US
By Ralph Kalsi   |  Oct 20, 2022 00:52
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Even though it's been quite some time since crypto's introduction to the world, it still mystifies most of the population, including most authorities. In the US, they are taking steps to understand the implications of this new currency. Almost a third of millennials and more than half of the Gen Z population expect a portion of their salaries to be in crypto. So the tax authorities in the US have come up with specific laws and regulations in most areas of crypto, but there are still a few areas where regulation laws are ambiguous.

How is crypto taxed in the US?

Crypto is treated as property by the Internal Revenue Service (IRS), as mentioned in their guidelines revenue ruling 2019-2024. However, based on circumstances, two types of taxes are applicable for your crypto - capital gains tax and income tax. Your virtual assets are taxed the same way all other assets, like stocks, bonds, gold, and more, are taxed. So, for example, if you buy some cryptocurrency for, say, $5,000 and then sell it for, say, $7,000, you pay capital gains tax on the $2,000 profit you made. However, you pay income tax if you earned it from a transaction like a salary, interest from lending, airdrop, and more.

How do you know if you owe crypto taxes?

No matter the regulations, not every crypto event is taxable in the United States, and neither is everyone liable to pay taxes.

Taxable crypto events
Practically any time you make a transaction using cryptocurrency, you pay taxes - almost similarly in the case of fiat currency, which includes - Selling crypto for fiat money, trading one crypto for another crypto, buying products/services using crypto. There are a few more situations where you pay taxes on your crypto. These are -

Crypto mining: Individual miners are uncommon now in the crypto world, with companies hiring professional operators, especially big cryptos like Bitcoin. Yet some people mine for relatively unknown cryptocurrencies to earn personal income. However, crypto mining may subject you to double taxation. Taxation on a $0 cost basis income means mining one cryptocurrency of value, say, $100, will draw an income tax on the $100. Capital gains tax while selling/trading your mined cryptos, which means when you trade the above $100 value crypto for, say, $250, you pay capital gains tax on the $150 profit you made.
On the other hand, you can earn some tax deductions by showing company expenses such as mining equipment and more.

NFTs trading or mining:
NFTs are taxed like cryptos - whenever you make a transaction or a capital gain. However, there haven't been any clear IRS guidelines on how to tax them yet. And taxes have been generated so far on a case-by-case basis. So far, people have been taxed for NFT creation and NFT investments.
  • For NFT creation- If you are a one-time NFT creator, you may have to pay taxes on the gas fees for minting an NFT. For instance, say you spend 1 ETH on gas fees which you originally bought for $100, but it's worth $200 at the time of minting. Then you pay capital gains tax (based on how long you held the ETH before this point) on the $100 profit. However if you were a seasoned creator who routinely produced NFTs as a business, $100 would be considered a regular business expense that you can deduct from taxes. On the other hand selling an NFT or trading it for another NFT, and any royalties earned from your created NFTs will draw income tax.
  • For NFT Investment- If you're investing in NFT collectibles like NFT art or purchasing any NFT using any form of cryptocurrency, you'll be subject to capital gains tax. The amount depends on how long you owned the NFT and whether you made money.

Airdrops and Forks:
Even after the update, IRS taxation guidelines for airdrops and forks have been somewhat vague. According to the new policy, cryptocurrency acquired via an airdrop or a hard fork of an existing blockchain is ordinary income. The income received is equivalent to the new cryptocurrency's fair market value at the time of receipt. Even if you don't want it, you still need to pay taxes on it since you received it.

Non-taxable crypto events

Even though the list of taxable cryptos may sound long, there are a few situations where you don't have to pay taxes, too, as follow:
  • Only exchange your fiat money for virtual money and keep it in your wallet. Taxes don't apply until you make a purchase.
  • Purchasing NFTs with fiat currency.
  • Transferring crypto between your crypto wallets.
  • Making a crypto donation to a tax-exempt organization.
  • Gifting cryptocurrencies (up to $15,000).

Tax Breaks and Deductions


There are a few situations where you can claim tax deductions, as follow:
  • If the crypto you were holding depreciated at the time of purchasing an NFT.
  • Business expenses in the crypto business.
  • Capital losses (discussed later).
However, note that one cannot claim lost or stolen cryptocurrency as a capital loss. You would get no tax deductions for it unless it happened during a federally declared disaster, which is very rare.

How much do you pay in taxes for crypto?

In the US, your personal Federal Capital Gains Tax rate, your Federal Income Tax bracket, and the time you've owned your assets will all affect how much tax you pay on cryptocurrency gains.
  • Income tax: As you must know, the income tax you pay depends on your federal income tax bracket, which is between 10% and 37%. Nonetheless, tax exemption is available for single people with income under $41,675; for the head of the household, it's $55,800; for married people filing separately, it's $41,675; and for married people filing together, it's $83,350.
  • Short-term capital gain: Profit from a cryptocurrency asset held for less than a year is taxed at the same rate as your federal income tax bracket, anywhere between 10% and 37%.
  • Long-term capital gain: Gains or losses from a bitcoin asset held for more than a year are taxed at a significantly reduced rate, depending on the individual's or the couple's combined income, of 0%, 15%, or 20%.
  • Capital losses: Capital losses might counter capital gains. You can deduct your capital losses from your annual income up to $3,000 if your capital losses outweigh your profits. If your net capital loss exceeds this threshold, you may carry the excess loss forward for as many subsequent tax years as you like.
In conclusion,

Crypto is a big and complicated industry right now, plus it's constantly and rapidly growing. Although IRS guidelines are easily available, they haven't been able to keep up with all the growth. Also, crypto tax regulations are still quite cryptic, and there's no clear mention of all tax exemptions. So it is always better to work with professionals and discuss your taxes to avoid mistakes and find tax breaks suited to you.


Regulations for Crypto taxes in the US
 

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Regulations for Crypto taxes in the US

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