- After two IRS rulings, the United States is finally ready to release a tax regime for the cryptocurrency sector.
- The initial April 15th deadline for filing U.S. taxes has been moved to May 17th.
- Tax on crypto profit will be similar to those charged on a stock sale.
- The amount paid in taxes will vary depending on the type of transaction and for how long one holds the cryptos.
More than ever, the regulatory gaze has been fixed on the crypto industry. This is quite understandable given how the industry has grown in leaps and bounds over the last year, enjoying the most institutional interest and patronage ever.
Along with the growing calls for regulation, has been the need to create an appropriate tax framework for cryptos. To date, the Internal Revenue Service (IRS) has two guidance regarding cryptocurrency tax issues – the 2014-21 and 2019-24 IRS Revenue Rulings.
In the coming weeks, the crypto space in the United States will become taxed. Here’s what you should know going into tax season.
Cryptos to Become Taxable
The United States will be joining countries like Japan, Russia, Australia and others in taxing cryptocurrency transactions. However, the initial April 15th deadline for filing U.S. taxes has been pushed to May 17th.
The crypto transaction tax will be similar to the framework implemented for stocks transactions. Cryptocurrencies will be treated like a stock sale which can result in a positive return (which translates to capital gains tax exposure).
Tax Rules for Buying and Selling Cryptos
As the tax season draws near, all those involved with cryptos must understand where and how the tax rules are applicable. All cryptocurrency transactions will be taxable after the laws are enacted.
Converting your crypto holdings to fiat currency, another crypto, or using cryptos to purchase goods and services will count as capital gains events.
However, the percentage of tax to be paid will depend on the length of time one has held the cryptos. Holding short-term trades or activities (less than one year) will attract a tax that is equivalent to the individual’s income tax rate.
Individuals who hold their cryptocurrencies for more than one year may end up paying lower taxes in the range of 0-20%. This will depend on the individual’s income tax bracket.
On the Flipside
- A judge has handed a 3-year suspended jail sentence to a man convicted of crypto tax evasion
- Hideji Matsuda was convicted in the Kanazawa District Court in the Ishikawa Prefecture
- In addition, Hideji Matsuda has been ordered to pay a fine of $163,000 for hiding his Bitcoin earnings from the authorities
When Will Cryptos Be Treated as Income?
As earlier mentioned, not all crypto transactions will be categorized as capital gains. Cryptos received from mining, staking and node validation, liquidity pooling, interest earned from DeFi lending, and receipts of crypto payment for goods and services will be categorized as income.
When an individual receives cryptos from any of the above-mentioned sources, it is categorized as an income and will be taxed at the same rate she/he/they pay on other income received during the year.
Since the tax is applicable from 2020, holders will need all the crypto transactions performed in 2020, placing them in capital gains or income properly, before the filing process can commence. To pay one’s taxes, Per Shane Brunette explains that;
Airdrops, Awards, and Giveaways from competitions will also be categorized as income.