Any American who traded cryptocurrencies in 2021 must now report their earnings to the Internal Revenue Service. Tax returns must be submitted between January 24 and April 18, with late fees assessed after that date.
In the United States, cryptocurrencies, including non-fungible tokens (NFTs), are still considered “property” for tax purposes. In a notice issued in 2014, the IRS made this determination, which means that the vast majority of taxable actions involving digital assets will be subject to capital gains tax treatment, similar to how stocks are taxed.
However, cryptocurrency gains from specific sources are considered income and subject to taxation as such. Over the past year, new activities related to decentralized finance have contributed significantly to the vagueness of this guidance around taxable events.
When Do U.S. Citizens Have To Pay Tax On Crypto?
Capital gains tax events involving cryptocurrencies include:
- Selling cryptocurrency for fiat (U.S. dollar, Japanese yen, etc.).
- Sending cryptocurrency as a gift (anything over $15,000 for the 2021 tax year).
- Purchasing goods and services with cryptocurrency, even small purchases like buying a coffee.
- Trading or swapping one digital asset for another. This includes purchasing NFTs using cryptocurrencies.
The Internal Revenue Service has not yet clarified whether or not the act of minting tokens constitutes a taxable event. This includes the creation of wrapped tokens, the public minting of NFTs, and the minting of interest-bearing assets. Further, it is currently unclear whether or not a crypto-crypto transaction is involved when a liquidity provider (LP) token is used to deposit or withdraw liquidity from a Defi liquidity pool. If you’ve had any dealings with these types of property or activities during the previous tax year, you should seek out expert advice.
Events that affect income tax include:
- Receiving cryptocurrency from an airdrop.
- Any crypto interest earnings from Defi lending.
- Crypto mining income from block rewards and transaction fees.
- Crypto is earned from liquidity pools and interest-bearing accounts.
- Receiving cryptocurrency as a means of payment for carrying out work, including bug bounties.
To determine how much cryptocurrency tax you owe in the United States, you’ll need to know how long you held the assets before selling them and what your income tax bracket is.
This is divided into two sections:
Tax exempt #crypto transactions under $200 would be a big deal for small retail adoption in the USA!
Buy a beer, lunch, a shirt, a haircut, etc. all without people being scared of taxes.
— Lark Davis (@TheCryptoLark) June 8, 2022
Short-term capital gains: If you hold a crypto asset for less than a year, any profits you make are taxed at the same rate as your income tax bracket. There is a $3,000 limit on the number of losses that can be used to reduce taxable income. There is the possibility of accumulating further losses and bringing them forward.
Long-term capital gains: When crypto assets are held for more than a year, the capital gains tax is much lower. It can be 0%, 15%, or 20%, depending on an individual’s income or the income of a married couple.
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