Notice 2014-21, published by the Internal Revenue Service (IRS), provides taxpayers with some advice on the taxability of transactions using cryptocurrencies, or “virtual currencies,” as the IRS prefers to call them. More recently, the IRS released Revenue Ruling 2019-24 and revised Q&A format instructions, providing taxpayers with more tax guidance on cryptocurrencies, particularly about hard forks and airdrops; you can also contact a CPA in Houston, TX.
Since the IRS views digital currencies as property rather than money, they are often taxed as capital assets like stocks and bonds. As a result, any products or services acquired with cryptocurrencies are regarded as “sales,” enabling the IRS to levy any profit made on their sale.
However, you only have to pay taxes if you make a profit. You do not owe taxes on any losses you incur when selling, exchanging, or using your cryptocurrency, and you can use those expenses to offset any gains you might have made on other investments over the year.
Cryptocurrency earned
If you get bitcoin, whether earned through mining, staking, lending, a promotion, or payment for products or services, it must be declared as ordinary income and is subject to tax at your maximum marginal rate.
Rules for wash sales
Currently, bitcoin is exempt from the Wash Sale Rules, but this could change shortly if the proposed legislation is passed.
The Wash Sale Rule related to stock sales and acquisitions might already be familiar to you. It specifies that any loss resulting from the sale of shares cannot be recovered if the seller buys more shares of the same security or one that is nearly identical within 30 days of the sale. The loss is not erased; instead, it is postponed till you sell the recently bought equities.
Of course, the Wash Sale Rule applies to any stocks you purchase if they are tied to cryptocurrencies.
Additional Cryptocurrency Taxable Circumstances and Penalties
- There are additional tax pitfalls that cryptocurrency fans might not be aware of, including:
- Foreign third-party providers that run offshore trades and digital wallets might need to file FBAR and FATCA reports.
- Damages are no longer deductible for tax purposes, with a few exceptions.
- Using cryptocurrency to make such a purchase might require you to declare your cryptocurrency as personal use property, which could result in higher taxes for you.
- Since they are likely to be classified as collectibles for taxation purposes, non-fungible tokens are subject to a higher tax rate than most cryptocurrencies.
