Cryptocurrency has become increasingly popular over the past few years, and with its rise, the US government has been paying more attention to how it is taxed. If you are a cryptocurrency holder or trader, it is important to understand how the US tax system applies to your crypto assets. In this blog post, we will provide an overview of US taxation of cryptocurrency and what you need to know to comply with the law.

How is Cryptocurrency Taxed in the US?

The Internal Revenue Service (IRS) treats cryptocurrency as property for tax purposes. This means that each time you sell, exchange, or dispose of cryptocurrency, you must calculate and report any capital gain or loss on your tax return. The capital gain or loss is the difference between the cost basis (the amount you paid for the cryptocurrency) and the fair market value (FMV) of the cryptocurrency at the time of sale or exchange.

For example, let’s say you bought one Bitcoin for $10,000 and sold it for $60,000. The capital gain would be $50,000. If you held the Bitcoin for less than a year, the gain would be considered short-term capital gain, and if you held it for more than a year, it would be considered long-term capital gain. Short-term capital gains are taxed at your ordinary income tax rate, while long-term capital gains are taxed at a lower rate.

If you received cryptocurrency as payment for goods or services, the FMV of the cryptocurrency at the time of receipt would be included in your gross income and would be subject to income tax. If you mined cryptocurrency, the fair market value of the cryptocurrency when you received it would be considered taxable income.

What are the Tax Reporting Requirements for Cryptocurrency?

If you sold, exchanged, or disposed of cryptocurrency during the tax year, you must report it on your tax return. This means that you must include a Schedule D with Form 1040 to report your capital gains and losses.

In addition, if you received cryptocurrency as payment for goods or services or if you mined cryptocurrency, you must report it as income on your tax return. The income would be reported on Form 1040 as either business income or personal income, depending on the circumstances.

It is important to note that the IRS has been cracking down on taxpayers who fail to report cryptocurrency transactions. In 2019, the IRS sent warning letters to more than 10,000 taxpayers who it believed may have failed to report cryptocurrency transactions.

What are Some Tax Strategies for Cryptocurrency?

One tax strategy for cryptocurrency is to hold it for more than a year to take advantage of the lower long-term capital gains tax rate. Another strategy is to offset gains with losses. If you have a capital loss in cryptocurrency, you can use it to offset capital gains in other assets, such as stocks or real estate.

It is also important to keep accurate records of your cryptocurrency transactions, including the cost basis and FMV at the time of sale or exchange. This will make it easier to accurately calculate and report your capital gains and losses.

Conclusion

US taxation of cryptocurrency can be complex, and it is important to understand the tax implications of your crypto transactions to avoid penalties and fines. At JTT Accounting, we can help you navigate the tax rules and regulations for cryptocurrency and ensure that you comply with the law. Contact us today to learn more about our US Tax Accounting services.