People investing, transacting, and dealing with cryptocurrencies have increased over the years. Is cryptocurrency taxed? If you are a novice in the crypto world you need to understand that crypto is treated as property in the U.S. So naturally, your crypto transactions will be taxed just like any other property you own. The Internal Revenue Service (IRS) has special laws concerning crypto taxes and we are here to discuss just that.
Here’s something you should be familiar with:
Table Of Contents
- 1 What are Digital Assets?
- 2 How is Cryptocurrency Taxed?
- 3 Things to Remember About Cryptocurrency Taxes
- 4 What’s The U.S. Government’s Take on Cryptocurrency Taxes?
- 5 The Bottom Line: How is Cryptocurrency Taxed?
What are Digital Assets?
Virtual currencies are treated as digital assets by the IRS which means they function as
- A store of value
- A unit of account
- A medium of exchange
Cryptocurrency is a digital asset that validates and secures transactions by using cryptography. These transactions are recorded in a distributed ledger called blockchain (or similar technology). If a digital asset has an equivalent value in real currency or even acts as a similar substitute, IRS signifies it as convertible virtual currency (like Bitcoin).
How is Cryptocurrency Taxed?
Tax consequences of digital assets like cryptocurrency are as follows. You have to pay the required tax when you
- Sell a cryptocurrency
- Exchange it for services, goods, or properties (means transactions)
- Trade or exchange the cryptocurrency for another one
- Receive a cryptocurrency as payment for services or goods
- Receive cryptocurrencies through staking or mining
- Use cryptocurrencies to pay for services or goods
- Dispose of any financial interest through it
- Transfer or receive crypto for free (this is not a bona fide gift)
Is Cryptocurrency Taxed When It’s Gifted?
The annual gift tax exemption for 2022 is $16k, according to federal law. So as long the value is under $16k, you don’t have to file a gift tax return or use up your lifetime gift tax exemption amount, which is set at $12.06 million.
If you are married, the annual gift tax exemption amount is calculated by combining both your and your partners’. This way you can give up $32k of cryptocurrencies per person each year with no gift tax returns. More than that (either $16k individually or $32k combines), you have to file the gift tax returns (IRS form 709).
Things to Remember About Cryptocurrency Taxes
Just like other digital assets you must recognize the loss or gain when you sell the cryptocurrency (i.e., treat it the way you would deal with selling mutual funds, bonds, or stocks). If you have short-term capital gains for assets you held under one year, you will have to pay ordinary tax rates. On the other hand, for assets held for more than a year, you will have to pay long-term capital gains.
Is Cryptocurrency Taxed When One Dies?
The same rules applied in real estate, mutual funds, bands, or stocks apply to cryptocurrencies when one dies. An appraisal will be issued to determine the value of the digital asset and a stepped-up basis equal to the current market value of the cryptocurrency at the time.
Usually, the after-death cost basis adjustments increase the tax basis because those assets are long-term holdings that have long-term rates of return. Say, for example, you bought Bitcoin for $1 and held on to it till you died when its worth was $400,000. Your heirs will inherit that same amount basis and the fair market value at the time will be included in your estate tax return.
What’s The U.S. Government’s Take on Cryptocurrency Taxes?
So how is cryptocurrency taxed under the Joe Biden administration? Under the Infrastructure Investment and Jobs Act, of 2021, cryptocurrency brokers must collect detailed information about their customers such as their
- Losses, etc.
The Act has been signed for implementation in January 2023 and the companies have to send in their reports to the IRS and their clients in 2024. This Act will make it easier for the IRS to reduce crypto tax evasions and the cryptocurrency investors to do their taxes.
The Bottom Line: How is Cryptocurrency Taxed?
The volatile market of cryptocurrencies works by increasing its value when enough people think it is valuable. With no regulation in effect as of yet, demand leads to fluctuations and extreme changes in competition, utility, demand, and supply.
Several estate planning techniques that include making charitable donations at death, gifting trusts, or family members require valuations of the digital asset involved. Companies like Eqvista and Redwood Valuation help customers perform these cryptocurrency valuations. They adopt certain approaches to do so:
- Quality theory or money
- Cost approach
- Income approach
- Market approach
- How much tax do I pay on crypto?
For long-term gains, you will typically have to pay 0%, 15%, or 20% depending on your filling and income status. If your taxable income lies between $0 to $41,675, you will have to pay a 0% long-term capital gains tax rate.
- How do I avoid crypto tax?
You can legally avoid paying taxes on crypto by
- Holding on to it
- Taking advantage of tax=free thresholds
- Offsetting gains with losses
- Investing it into an IRA (annuities or pension fund)
- Using the annual gift tax exemption
- Changing your tax rate
- Donating to charity
- Offloading it to your spouse
- How do I withdraw crypto without paying taxes?
People with less than $78,570 incomes can cash out Bitcoins at a 0% capital gains tax-free rate. You may also avoid paying taxes on Bitcoin by changing your citizenship or by investing in it in strategic investment accounts.