Are Crypto Currencies Taxable?
Cryptocurrency has quickly become popular, yet the IRS reminds everyone that it is still subject to tax. They are increasing enforcement against cryptocurrency taxes and require you to report income generated from trading and mining activities as well as paying any applicable state sales and use taxes associated with virtual assets.
As opposed to its U.S. dollar equivalent, cryptocurrency’s value isn’t tied to promises made by government or central banks; rather, its worth is determined by market forces, making its fluctuating worth subject to significant gains or losses depending on fluctuations. A cryptocurrency worth thousands today could suddenly drop in value drastically overnight; also unlike bank accounts in America which are insured against losses by federal law, digital wallets storing cryptocurrencies don’t enjoy similar protection from government.
Due to this, the IRS considers cryptocurrencies property, taxing them upon their sale at a profit. Your short- or long-term capital gains tax liability depends on both how much and for how long you sold it.
Your earnings from mining, staking or other crypto-related activities must also be reported as ordinary income when you receive them. When reporting the value of each cryptocurrency you earn as income to the IRS, its fair market value (typically its purchase or sales price later on) must be used as the basis for calculating its cost basis – you may track this using either first in, first out (FIFO) or Specific Identification methods.
If you experience a loss when selling cryptocurrency, that loss can offset any gains on future sales or up to $3,000 of taxable income per year. If more losses than gains occur within any one year, they can rollover into future years.
Many taxpayers overlook reporting their crypto transactions because they don’t perceive them as taxable income, but this could be costly since the IRS views cryptocurrency as property that must be sold at more than it cost initially in capital gains taxes. With cryptocurrency becoming more widely popular and with enforcement tightening up accordingly, reporting all activity will ensure no unexpected tax surprises come tax filing time. For more on personal finance, tech and tools and wellness follow CNBC Select on social media!