The entrance of a cryptocurrency exchange on April 16, 2021 in Istanbul, Türkiye. The Turkish Central Bank announced a ban on the use of cryptocurrencies and crypto assets for purchases, directly or indirectly to pay for goods or services. The announcement comes at a time when the Turkish crypto market has been booming in recent years. As the Turkish lira has plummeted, many people have turned to cryptocurrencies to protect themselves from inflation. Cryptocurrencies gained global traction this week after cryptocurrency exchange Coinbase launched on the New York Stock Exchange. (Photo by Chris McGrath/Getty Images)Getty Images
With Bitcoin (BTC) hovering around 45,000 and tax season fast approaching, there has never been a better time to talk about how the IRS taxes your cryptocurrency income.
Cryptocurrencies such as Bitcoin are treated as property according to IRS Notice 2014-21. You may be required to report your cryptocurrency gains on your 2023 tax return and pay taxes if you made any of the following transactions in 2023.
Taxable cryptocurrency transactions
1/ Sell cryptocurrency or non-fungible token (NFT NFT) in USD (withdrawal)
For many people, this is probably the most clearly reportable event.
Suppose you bought 1 BTCBTC for $20,000 in January 2023 and sold it for $41,000 in December 2023. Your profit from this transaction is $21,000 ($41,000 – $20,000). This $21,000 is considered a short-term capital gain because you only held your coin for less than 12 months. Consequently, $21,000 is taxed as ordinary income and subject to your income tax bracket, which ranges from 10% to 37%.
Alternatively, if you were to sell the BTC after holding it for more than 12 months, the $21,000 gain would depend on long-term capital gains, which offer you more favorable tax rates (0%, 15%, or a maximum of 20%). ).
2/ Converting one cryptocurrency/NFT to another cryptocurrency/NFT
For many people, this may be the most surprising taxable event.
Say you bought 1 BTC with 40 Ether (ETHETH) worth $40,000. You bought this ETH a few years ago for $10,000. In this transaction, a gain of $30,000 ($40,000 – $10,000) is subject to capital gains tax. The logic here is that if you spend 40 ETH to buy 1 BTC, your wealth will have increased by $30,000 due to the appreciation of ETH. This IRS taxes this delta. For tax purposes it is irrelevant whether you receive cash or not (A16).
3/ Spend cryptocurrency to purchase goods or services
Although somewhat unusual, you can spend cryptocurrencies to purchase goods and services.
Suppose you spent 1 BTC to buy a car in 2023. A few years ago you spent $10,000 to acquire this BTC. When you spent the money on the car, it was worth $40,000. Here you have a taxable gain of $30,000 ($40,000 to $10,000) subject to capital gains tax.
4/ Earn cryptocurrency through wages, mining and staking
You can earn cryptocurrencies through various methods such as: B. through labor income, mining rewards and staking bonuses. These types of rewards will be taxed as ordinary income at the time you receive them, based on your tax bracket.
Suppose you earned 1 BTC as a mining reward. At the time of receipt, this is worth $30,000. Based on your normal income tax bracket, you would be taxed on $30,000 of income. Suppose you later sold this coin for $40,000. Here, the $10,000 delta ($40,000 – $30,000) is taxed as a capital gain.
5/ Receiving cryptocurrency via an airdrop or harfork
Finally, based on IRS Rev. Rul. From 2019 to 2024, cryptocurrencies received via airdrops and hard forks will be taxed as ordinary income at the time of receipt. It is quite common for the coin value to drop after you receive the airdrop. Unfortunately, you can't get a tax break for this unless you sell the coin to make up the loss.
Other complex cryptocurrency-related transactions such as wrapping, liquidity pools, borrowing and bridging could also give rise to taxable events depending on the facts and circumstances of each case.
Non-taxable events include holding cryptocurrencies, transferring assets from one wallet/exchange you own to another, donating cryptocurrencies to a charity, and sending and receiving gifts in cryptocurrencies.
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Shehan is the head of tax strategy at CoinTracker.io (bitcoin and crypto tax software). He is one of the few CPAs in the country recognized as a real-world operator and conceptual subject matter expert on cryptocurrency taxation.
He is a CPE educator who has received several awards: 2019 CPA Practice Advisor 40 among 40 accounting professionals, Outstanding Young CPA of the Year, and among the 21 accountants featured on Accounting Today who are shaping (and reshaping) accounting in 2020 ) are also published by Accounting Today
Shehan is a renowned speaker who has presented to many organizations including Google, Coinbase, Lyft, AICPA, American Bar Association and State CPA Societies.
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