Crypto tax enforcement has become key compliance before for the Internal Revenue Service (IRS). While the tax rules continue to emerge, the past few years have proven that the IRS seeks to aggressively seek enforcement.
The IRS issued a revenue ruling on the crypto treatment in 2019. Instead of the revenue ruling, many questions still need to be addressed about how the crypto income and reporting are treated, particularly if it includes overseas and international Cryptocurrency.
However, in 2020 The U.S. Individual Income Tax Return form known as FORM 1040 has a direct question related to digital currency on the very first page of the tax return. That should clearly indicate how Cryptocurrency has become a key enforcement priority for the U.S. government.
Tax filing day might be months away, to be exact. However, if you’ve bought, traded, sold, and earned or lost Cryptocurrency this year, now is the time to prepare. Let’s have a look at the most commonly asked questions about crypto and taxes in the United States.
5 Most Common Crypto Tax Questions
1. How does the IRS know you own crypto?
Digital currencies, including NFTs (non-fungible tokens), are treated as “property” for the purposes of tax in the U.S., originally decided by the IRS (Internal Revenue Services) in the year 2014.
This means that most taxable actions, including crypto assets, will incur capital gains tax treatment, the same as how stocks are taxed.
In 2022, there are two main methods the federal agency keeps track of. The first is through self-reporting. The U.S. Individual Income Tax Return form, called Form 1040, asks if, at any time during the past year, “did you sell, receive, exchange, or anyways dispose of any financial interest in any virtual currency?”
The unknown nature of Cryptocurrency makes it hard for the IRS to learn about a given taxpayer’s crypto transactions. To get around this, they have turned to the legal system.
This summons requires crypto brokerages to share user data with the federal agency so that data can be used for auditing, identifying, and prosecuting taxpayers to avoid giving their profit and share of taxes on cryptocurrency gains.
“The IRS is getting better by requesting information from the broker-dealer houses that transact on this type of activities,” says Mark Steber, the chief tax information officer at Jackson Hewitt.
They have previously served a summons on companies such as Circle and Kraken to confirm if the firms’ customers are properly reporting their taxes. Crypto broker-dealers must inform their customers of transactions in 2023 when the ball drops in 2022. Every subsequent year the IRS due to the U.S. Infrastructure Bill being passed in November 2021.
2: How much do you have to pay in taxes?
Calculate how much cryptocurrency tax you owe in the U.S. depends on how long you’ve held the assets before disposing of them, as well as which income tax bracket you fall under.
- Short-term capital gains
Suppose you hold digital currencies for 12 months or less. Your capital gains rate is similar to your ordinary income tax rate, which depends on your total income.
- Long-term capital gains
If you hold digital currencies for 12 months or more, the capital gains tax is much lower than short term. Most filers are paying at most the 15% rate.
3: Can you write off a crypto loss?
To reduce your overall tax, capital losses can offset any capital gains tax.
Here is an example:
Earlier in the year 2022, you made a purchase of BTC. Then you can sell it and land a nice $10,000 profit. That profit is your capital gain. It will be taxed.
But you saw that Elon Must tweeted a picture of a Shiba Inu dog, and dogecoin started pumping. You have enough dogecoin at the top right before it begins to drop once again. You’ve got a $3,000 loss in the meme token.
You sell your coin at a loss and convert it to cash. Now, you can take that $3,000 loss to offset your $10,000 gain from the BTC purchase you made when the markets were happier.
Now, you need only to pay short-term capital gains tax on that $7,000. You can offset up to $3,000 of crypto losses annually. If you’ve incurred more than that annually, it would be carried over to future tax years.
4: How are crypto gifts taxed?
“Gifts in virtual currency work a lot like a stock gift, bond gifts, or gifts of any capital asset,” said Mark Steber, Jackson Hewitt’s chief tax information officer.
Gifts from Cryptocurrency aren’t taxable on the initial transfer from the owner to the new gift recipient. In the United States, gifts up to $16,000 per single recipient and $32,000 per couple will be tax-free in 2022.
That limit would be raised to $17,000 in the year 2023. Suppose you’re gifted or planning to gift crypto over the limit. In that case, it’s best to talk with a tax professional to understand the tax implications.
5: How are earnings from mining taxed?
The IRS has clearly stated that taxes on mining earnings count as income tax depending on the fair market value of the crypto the day you received it.
Here’s an example:
You’re running a bitcoin mining rig, and you earned one BTC. The minute that BTC hits your wallet, the fair market value of BTC is $25,000. Now, you’ve realized $25,000 of income that needs to be reported as such on your tax filings.
If you later trade, sell or spend any of that one BTC, you need to pay capital gains tax if the price is higher than when you received it.
One of the biggest concerns regarding Cryptocurrency, BTC, is determining how to treat it for U.S. tax and reporting issues. The above article includes the Top Five crypto tax questions.
Based on circumstances, taxes are usually realized when you make transactions. For now, all crypto tax is at a rate of 33% on the profit that is made between the purchase and sale.