How CryptoCurrency Tax Laws in the US are Changing? – A Complete Guide to Crypto Taxes

To this date, 17% of Americans invest in crypto regularly. Rain or shine, crypto will always fetch you high returns. And Americans seem to understand that lately. In addition, 61% say that they bought crypto at least once in their lifetime. Hence, Americans are well aware of crypto as an investment option. For example, there is a 30% flat tax applicable on crypto. In addition, 1% TDS is also relevant. In the same notion we will study the Cryptocurrency tax laws in the US in depth later.

Crypto transactions are, however, unregulated. The Securities and Exchange Commission cannot control crypto trade directly. So, there are other means to control and filter crypto trade.

Key Highlights

Why do you need to clinically understand the crypto tax laws so severely? Firstly, the standard crypto tax is 30%. If you fail to comply with the tax norms, you’ll attract a heavy dent in your cibil score. Moreover, your tax fraud would be reported to the IRS.

On the other hand, people who pay crypto taxes regularly enjoy hordes of other benefits. Some of them are tax benefits on schemes. Hence, experts at FinanceTeam did detailed research to compose this blog on cryptocurrency tax laws in the US.

Overview of Cryptocurrency Tax Laws in the US

You must pay taxes on your crypto holdings. But the holding becomes tax-worthy when you sell it or use it for a transaction. However, the whole holding is not taxable. You must pay tax on the incremental gain you make from the sales transaction.

For example, your crypto got a spike of 4% this morning and you decided to sell it immediately. If you made a profit of $500 on the transaction, 30% of the same would be directly taxable.

And 1% of the rest would be deducted as TDS tax.

Now, let’s learn more about the current Cryptocurrency tax laws in the US. Knowing the regulations would make you more aware of the taxes pending-

IRS Notice 2014-21: treatment of virtual currencies as property

IRS’s Notice 2014-21 applies all general taxation principles to the crypto trade and transactions. The notice says that all virtual currency transactions would attract federal taxes at standard rates.

If you use crypto to buy stocks, real estate, etc, the same would also be taxable. The standard tax rate of 30% would be applicable on the same too.

Tax classification of cryptocurrencies

The tax rates for different forms of income are also different. For example, capital assets attract taxes based on a different rating policy. However, the taxes on ordinary income are calculated separately.

For example, buying 1 Bitcoin against $6000 and selling it for $8000 after 3 months. You will pay taxes for the $2000 additive gains. Here, the short-term capital gains tax rate would be applicable. Generally, your short-term capital gains tax would be upwards of 37%. The same applies to the Best cryptocurrency to invest in USA, too.

If you hold it for over a year, the rate will come down to 15% or less. However, that is not the same as the taxes applicable on regular income. You may be taxed something between 10 to 37%. However, the top tax margin is 37% here.

Tax Implications of Common Cryptocurrency Transactions

The crypto taxation rate is the standard federal taxation rate of 30%. However, as I mentioned, the short-term taxation rate for capital gains varies.

Buying and selling cryptocurrencies

When buying and selling crypto, the tax rates vary as per the tenure of the holding. Let’s say you purchased crypto for $5000 and sold the same after 24 months at $10000. In this case you are liable to pay taxes for the extra $5000 earned only.

At the same time, you will be attracting a tax rate of 37% if you were to sell the same asset within 1 year of buying. But what if you made a loss in your transaction? In that case, you must report the loss duly to the authority concerned. In this case, the IRS. Fill out the IRS Form 8949 for reporting.

Wash sales and straddles.

The wash sale is one of the US’s most crucial Cryptocurrency tax laws. The law says that you cannot deduct a loss on sales of stocks and securities if you purchase the same or similar assets in a short while before or post the sales that set off your loss.

Straddle is, however, a unique crypto trading strategy. The taxes are high here, but there are also substantial earning windows. Firstly, the trader must add the “put” and “call” costs. Hence determine the cost of creating the straddle.

But when does a trader create a straddle? If you believe the crypto price may hike or drop from the existing price at the advent of the next FY, go for it. The prime target of the trader is to purchase a put and call at the strike of the base price (current price) within Mar 15. The Top cryptocurrency brokers in the US will help you to create a straddle easily.

Trading cryptocurrencies

While trading in crypto, you must know the Cryptocurrency tax laws in the US. Let’s check out the tax implications for the following processes:

Like-kind exchanges

When you exchange your real property used for trading or held as an investment for another investment or business, we call it a kind of exchange. Depending on the property, the tax rate may vary from 0 to 37%. When you trade one crypto for another, the same rule applies. The strength of your financial dashboard decides your tax slab, too.

Mining and staking cryptocurrencies

Mining, staking, or rewards (from US cryptocurrency exchanges) will likely generate income. Hence, the standard income tax rate would be applicable in these contexts. When you file your earnings, your taxes will be generated as per the income tax brackets you fall under.

At the same time, business expense deductions are not applicable for tax rebates in crypto trading. Any crypto related expenses like transaction costs cannot be claimed as deductions here.

Tax Reporting and Compliance

The tax reportings take place as per the IRS schedules. In essence, here are the crypto transaction tax reporting schedules:

Form 1040 and Schedule D

According to this schedule, all crypto exchange, buy and sales should be reported exclusively. Schedule D is for capital assets not reported on other forms or schedules.

Form 8949 and Schedule 1

If you want to report short-term capital gains, list them under Sch 1, Form 8949. After that the IRS will accept the file and document the tax slab you qualify for.

Consequences of non-compliance

There are staunch implications of noncompliance. If you violate the Cryptocurrency tax laws in the US, you will incur fines of up to $100,000. You may also have to spend upto 5 years in prison. You can, however, report all previous taxes evaded on crypto through Form 14457.

The IRS conducts Audits and examinations on crypto tax. It reviews your financial documents, including bank statements, credit card statements, and other significant records.

Tax Planning Strategies for Cryptocurrency Investors

All investors want to do away with as less tax payments as possible. In the same vein, here are some of the strategies you must know of:

The Holding periods above 1 year qualify for long-term capital gains. Meanwhile, short-term capital tax rates could be sky-high (at least 37%). But crypto taxes are susceptible to change. As crypto is not under the direct control of the SEC, the central and federal rate changes are not pivotal here. So, there is no means you can trace federal rates to know if a tax change is coming in.

But you can always read about any tax updates in the IRS portal. Visit it once a week and stay updated.

Charitable donations and cryptocurrency

If you donate crypto profits, you can get a waiver on 30% of your taxable crypto income. But you will get the rebate if you’ve owned the crypto for 1 year at least.

Beware of New Crypto Tax Rules for the following year!

There won’t be any significant changes for the taxpayers. However, the new rules technically rule out the first in, first out (FIFO) concept. And that applies to all digital assets and currencies. Instead, a wallet or account-based taxing approach would be followed.

The taxes will now be charged when the crypto moves from one wallet to another. Move all unused crypto into wallets by Jan 1 next year. Meanwhile, you must record the wallet transactions’ date, time, and amount. When filing, read the IRS website notification sections for any more changes to Cryptocurrency tax laws in the US.

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