Cryptocurrency is an asset subject to both capital gains and income taxes when sold or exchanged for services, and income taxes when earned as income. Therefore, it’s crucial that you keep track of all your purchases, sales, trades, airdrops, forks, mined coins, swaps and receipts so you can ensure you report the correct amounts for taxes. You can manually compile data from wallets and exchanges or utilize dedicated crypto tax software which compiles reports and filings automatically.
When is Crypto Taxed? A cryptocurrency is a digital asset used as an alternative currency or digital asset. It can be used for purchases, traded between users, and exchanged for real currency or digital assets. When purchasing items using cryptocurrency you are considered making sales tax transactions; when selling crypto you must also pay capital gains tax based on any differences between its selling price and adjusted cost basis.
As cryptocurrency transactions are typically anonymous, many believe evasion of taxes would be easier. But this is not true – the IRS has ample resources at their disposal to identify those trying to avoid paying their share of cryptocurrency taxes, including information from major exchanges and working with contractors like Chainalysis to trace blockchain records. Subpoenas have been issued and states worked with to enforce local laws as part of enforcement initiatives like Infrastructure Investment and Jobs Act 2021 which requires exchanges to issue 1099 forms to their customers beginning 2022 – giving the IRS enough data to match up anonymous wallets with known individuals allowing it to match up wallets with known individuals with ease.
If you hold cryptocurrency for more than one year before selling it, long-term capital gains rates (ranging between 10%-37% depending on your income tax bracket) must be applied when selling it. Otherwise, ordinary income rates apply.
Some individuals receive cryptocurrency as gifts, which should be treated as ordinary income if it comes from sources outside your trading activity. Others might earn it as payment for goods or services provided or through mining work on blockchain networks. In such instances, it is necessary to treat cryptocurrency income as business income and report it on your taxes as such. It would probably be best if a certified public accountant or other tax specialist offered assistance when trading cryptocurrency professionally. Accounting professionals can assist with understanding how the law applies to your specific situation and advise you on how to accurately report cryptocurrency taxes. NerdWallet offers ratings and reviews of top providers for handling crypto taxes – choose one based on account fees/minimums/investment choices/customer support/mobile app capabilities to find your ideal provider.