Taxation of Cryptocurrency in the USA
Cryptocurrency is a type of digital asset that has gained significant attention in recent years. As more people invest in and use cryptocurrencies, it is essential to understand the tax implications of these transactions. In this article, we will discuss how cryptocurrency is taxed in the USA.
Cryptocurrency as Property
The IRS considers cryptocurrency as property for tax purposes, meaning that cryptocurrency transactions are subject to capital gains tax. Capital gains tax is a tax on the profit made from selling an asset, such as cryptocurrency.
Cryptocurrency Mining and Taxation
Cryptocurrency mining is the process of generating new units of cryptocurrency by solving complex mathematical equations. Mining cryptocurrency is considered taxable income, and the value of the newly generated cryptocurrency is included in the miner’s gross income at the fair market value on the date of receipt.
Cryptocurrency and Capital Gains Tax
When a taxpayer sells cryptocurrency, they must report the sale on their tax return and pay capital gains tax on the profit made from the sale. The amount of tax paid depends on how long the taxpayer held the cryptocurrency before selling it. If the cryptocurrency is held for less than a year, it is subject to short-term capital gains tax. If it is held for more than a year, it is subject to long-term capital gains tax.
Calculating Capital Gains Tax on Cryptocurrency
Calculating capital gains tax on cryptocurrency can be complicated because the value of cryptocurrency can be volatile. However, the basic formula for calculating capital gains tax on cryptocurrency is as follows:
Selling price – basis = capital gain or loss
The selling price is the fair market value of the cryptocurrency on the date of the sale, and the basis is the original purchase price of the cryptocurrency, including any fees or commissions paid. If the result is a positive number, it is a capital gain, and if it is negative, it is a capital loss. The amount of tax owed is based on the taxpayer’s income tax bracket.
Cryptocurrency and Foreign Asset Reporting
US taxpayers who own more than $10,000 worth of cryptocurrency in foreign accounts must report their holdings to the Financial Crimes Enforcement Network (FinCEN) using the Report of Foreign Bank and Financial Accounts (FBAR) form. Failure to file the FBAR can result in significant penalties.
Cryptocurrency and IRS Reporting
The IRS has increased its efforts to enforce tax compliance in the cryptocurrency space. In 2019, the IRS issued new guidance on cryptocurrency taxation and sent warning letters to more than 10,000 taxpayers who may have failed to report cryptocurrency transactions properly. Additionally, the IRS has added a new question to the 2020 tax form asking taxpayers about their cryptocurrency holdings.
Conclusion
Cryptocurrency transactions are subject to capital gains tax, and taxpayers must report these transactions on their tax returns. The IRS considers cryptocurrency as property for tax purposes, and mining cryptocurrency is considered taxable income. Taxpayers who own more than $10,000 worth of cryptocurrency in foreign accounts must report their holdings to the FinCEN using the FBAR form. It is important for cryptocurrency investors to understand the tax implications of their transactions and to seek professional tax advice when necessary.