Cryptocurrency has quickly become an accessible form of payment and investment for many. Because of these uses, it is vitally important that we understand how the IRS treats cryptocurrency taxes – this article will address whether you should pay tax on crypto currency transactions as well as how best to report your transactions.
As with any investment, cryptocurrencies are subject to capital gains and income taxes. As per IRS requirements, individuals selling or exchanging cryptocurrency must keep detailed records of every transaction so as to accurately report them at tax time. These records should include information such as original cost as well as fair market value at each point in time. Furthermore, purchasing one type of cryptocurrency in exchange for another constitutes a taxable event regardless of whether fiat currency was involved.
As with all cryptocurrency transactions, mining, staking or airdrops require you to record their fair market values on an ongoing basis, the IRS requires this amount be reported as income on their tax returns with any date or total amount transactions being reported as income; original costs should also be documented as basis of holdings; any increases will be recorded as capital gains.
Interest earned on digital assets held is another source of cryptocurrency income, typically paid out as fees to centralized exchanges or as network transaction fees for those confirming transactions on the blockchain. Like all personal income, cryptocurrency income is subject to federal tax rates.
Finally, cryptocurrency awarded as part of a marketing promotion or airdrop or similar promotional activity must be declared as regular income and taxed accordingly. This also applies if someone gives you crypto as a gift or accepts crypto payments for goods and services provided to you.
Conclusion It is crucial to keep in mind that although cryptocurrency investments may seem anonymous, the IRS is working tirelessly to enforce tax compliance for crypto transactions. They have subpoenaed major exchanges and collaborated with contractors such as Chainalysis in tracking down potential illegal activity back to known individuals. With each passing day in the cryptocurrency industry it becomes more likely that more individuals will need to pay both income and capital gains taxes on their cryptocurrency investments.
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