Crypto Taxes in USA

Take outs:

• Taxable Events: In the US, cryptocurrency is subject to both capital gains and income taxes. Capital gains taxes apply when selling crypto for fiat, converting one crypto to another, or spending crypto on goods and services. Income taxes apply to earnings from crypto compensation, mining, staking rewards, DeFi rewards, hard forks, and airdrops.
  
  
• Tax Rates: The tax rate for cryptocurrency depends on the holding period. Short-term gains (for assets held less than 12 months) are taxed between 10-37%, while long-term gains (for assets held over 12 months) are taxed between 0-20%, based on income tax brackets.
  
  
• Tax-Free Transactions: Certain crypto transactions are not subject to tax, including buying crypto with fiat, holding crypto, moving crypto between personal wallets, gifting crypto, and creating NFTs. However, capital gains tax applies if gifted crypto is sold or traded.
  
  
• Tax Reporting and New Forms: Taxpayers must report crypto transactions on their annual tax returns using Form 1040 and Form 8949. Starting in 2025, Form 1099-DA will be introduced to enhance reporting of digital asset transactions, aiming to improve compliance but potentially increasing the reporting burden and raising privacy concerns.

Crypto Taxes in USA

In March 2014, the IRS issued Notice 2014-21, stating that for U.S. federal income tax applicability, cryptocurrency should be viewed as property, not currency. The Internal Revenue Service treats most other forms of cryptocurrency as convertible virtual currencies, meaning they can be a medium of exchange; a store of value; a unit of account; and can be used to buy goods and pay for services as a substitute for real money.

As such, gains or income on it will be subject to taxation. It is to be noted that the taxation of cryptocurrencies involves complex regulations, and tax obligations may vary in specific cases. Therefore, a thorough understanding of tax obligations by cryptocurrency users and owners is essential to avoid unexpected liabilities imposed by the IRS.

What are the Taxable Events in Cryptocurrency Trading?

In USA, cryptocurrency is subject to two types of tax: 

• Capital Gains Taxes ; and 
• Income Tax. 

Capital Gains Tax

Selling Crypto for Fiat Currency:
If you sell your cryptocurrency for U.S. dollars, you may be subject to taxes on any gains made if the sale price exceeds the purchase price. Conversely, if you sell at a loss, you may be eligible to deduct that loss from your taxes.

Converting One Crypto to Another:
When you purchase Ether using Bitcoin, it essentially involves selling your Bitcoin to acquire the new asset. Since this transaction qualifies as a sale, it is subject to taxation by the Internal Revenue Service (IRS).

Spending Crypto on Goods & Services:
If you use Bitcoin to purchase goods, you will likely be taxed. The cryptocurrency would need to be exchanged for a fiat currency before the transaction can be completed, and selling cryptocurrency is subject to capital gains tax.

Income Tax

Earning Salary in Crypto:
If you receive cryptocurrency as compensation from your employer, it will be taxed as income based on your income tax bracket.

Receiving Crypto in Exchange for Goods or Services:
If you accept cryptocurrency as payment, you must report it as income to the IRS.

Mining Crypto:
If you mine cryptocurrency, you may owe taxes on your earnings based on the fair market value of the mined coins at the time you received them. Cryptocurrency mined as part of a business is taxed as self-employment income.

Earning Staking Rewards:
Staking rewards are taxed based on their fair market value on the day they are received, similar to mining proceeds.

DeFi Rewards:
On the DeFi platform, earnings are subject to taxation similar to interest income. The market value at the time of receipt is considered assessable for tax purposes.

Receiving Crypto from a Hard Fork:
Taxes on cryptocurrency obtained from a hard fork depend on various factors, including how the asset is utilized and when it becomes available for withdrawal from the exchange. These factors play a crucial role in determining the tax implications of the forked cryptocurrency.

Receiving an Airdrop:
Receiving airdrops from a crypto company is taxable as income, and you must report it in your taxes.

The IRS does not allow cryptocurrency investors to claim lost or stolen cryptocurrency as a capital loss. Therefore, you cannot deduct these losses for tax purposes if you lose your cryptocurrency due to a hack, scam, or misplacement of private keys.

How Much is Cryptocurrency Taxed in the USA?

The amount of tax you will be subjected to for your crypto in the USA depends on the earnings, specific transaction, and the duration the asset has been held.

• If you earned cryptocurrency income or disposed of your crypto after less than 12 months of holding, you’ll pay tax between 10-37%, depending on tax brackets.
  
  
• If you dispose of your cryptocurrency after 12 months of holding, it will be considered as long-term capital gain and you’ll pay tax between 0-20%, depending on tax brackets.

Tax Free Crypto Transactions

You won't pay tax on crypto when:

• Buying crypto with fiat currency.
• Holding crypto.
• Moving crypto between your own wallets.
• Giving Crypto as a gift
• Receiving Crypto as a gift - you'll pay Capital Gains Tax if you dispose of your gifted crypto by selling it, trading it, or spending it.
• Creating an NFT

Cryptocurrency Tax Tips for Maximizing Returns and Minimizing Liabilities

There are ways to legally reduce your tax liability or optimize your tax strategy for crypto investments:

Holding Period:
One of the simplest strategies is to hold the cryptocurrency for over a year to qualify for long-term capital gains tax rates, which are generally lower than short-term rates.

Offset Gains with Losses:
Taxpayers have the option to offset their capital gains with capital losses to reduce their taxable income. If their capital losses exceed their capital gains, they can deduct up to $3,000 of the excess loss against other income. Any losses beyond this limit can be carried forward to offset income in future tax years.

Donations:
Donating appreciated cryptocurrency to qualified charitable organizations can allow you to potentially deduct the fair market value of the donated cryptocurrency from your taxes. Additionally, this method may help you avoid paying capital gains taxes on the appreciated value of the donated assets.

Cost Basis Method:
The accounting method you select, such as HIFO, FIFO or LIFO, can greatly affect your crypto tax bill. There's no universal right choice, as the best method depends on your specific situation to potentially reduce your taxes.

Reporting Requirements

Taxpayers must report cryptocurrency income and transactions on their annual tax returns using Form 1040, which includes a specific question about cryptocurrency activities to ensure compliance. Detailed transactions are reported on Form 8949, with net gains or losses summarized on Schedule D. High-volume and brokerage transactions may trigger Form 1099-K and 1099-B from exchanges or platforms, which taxpayers should use to report income and capital gains accurately. Accurate record-keeping and adherence to reporting requirements are essential to avoid penalties and ensure compliance with IRS regulations.

Starting in 2025, the IRS will introduce Form 1099-DA for reporting crypto and digital asset transactions. Digital asset brokers, including trading platforms and payment processors, must issue this form to investors for sales or exchanges of digital assets occurring on or after January 1, 2025. The Form is not finalized yet. However, it may include information about your crypto transactions, including Digital asset broker identification, Account number, Transaction dates, Transaction type (e.g., buy, sell, exchange), Transaction amount and Fair market value of the digital assets for each transaction.

The 1099-DA form would enhance tax compliance by ensuring accurate reporting of digital asset transactions, reducing underreporting and tax evasion. It would also simplify tax filing with a standardized reporting method. However, it would increase the administrative burden on the IRS and taxpayers, requiring more resources for accurate reporting and compliance, and raise privacy concerns by necessitating the disclosure of sensitive financial data to the IRS.