The US has taken a stance on cryptocurrency taxes – find out what it is and what it means for you and your digital assets.
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Cryptocurrency is a type of digital asset that uses cryptography to secure its transactions and to control the creation of new units of the currency. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
In the United States, the Internal Revenue Service (IRS) has taken the position that cryptocurrency is taxable as property. This means that capital gains and losses from cryptocurrency transactions are subject to taxation. cryptocurrency is also subject to self-employment taxes if it is used for business purposes.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. Many cryptocurrencies are decentralized systems based on blockchain technology, a distributed ledger enforced by a disparate network of computers. A defining feature of a cryptocurrency, and arguably its biggest allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
Cryptocurrency is also known as a digital currency, virtual currency or alternative currency. The first cryptocurrency was bitcoin, which was created in 2009 and is still the best known. There are thousands of alternative cryptocurrencies with different designs; some are meant to be spent, some are meant to be used only as an investment, and some are meant to fulfill other purposes.
How is Cryptocurrency Taxed in the US?
Cryptocurrency is taxed in the US like any other investment. If you buy crypto and hold it for more than a year, you will pay long-term capital gains taxes when you sell it. If you hold it for less than a year, you will pay short-term capital gains taxes.
In addition, if you use crypto to buy goods or services, you will owe taxes on the purchase price. This is true even if you don’t cash out your crypto, because the IRS views crypto as property, not currency.
The tax rate you owe on your crypto profits depends on your tax bracket. For most people, the long-term capital gains tax rate is 15%, but it can be as high as 20% if you are in a higher tax bracket. The short-term capital gains tax rate is your ordinary income tax rate.
If you have questions about how cryptocurrency is taxed in the US, we recommend speaking to a tax professional.
What if I Don’t Report My Cryptocurrency Taxes?
Not reporting your cryptocurrency taxes is considered tax fraud in the United States. The IRS has taken notice of non-filing taxpayers and has even launched special campaigns to target them. The failure-to-file penalty is 5% of the unpaid tax per month, up to a maximum of 25%. The failure-to-pay penalty is 0.5% of the unpaid tax per month, up to a maximum of 25%. If both penalties apply, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty. If you don’t file your return or pay your tax by the due date, you may be charged penalties and interest.
What if I’m a US Citizen Living Abroad?
If you are a US citizen living abroad, you are still required to file a tax return with the IRS. However, you may be eligible for certain tax breaks, such as the Foreign Earned Income Exclusion, which allows you to exclude up to $102,100 of your foreign earned income from your US taxes.
In short, the answer is “it depends.” Cryptocurrency is treated as property by the IRS, so it is subject to capital gains taxes. If you hold your crypto for less than a year before selling, it will be taxed as a short-term gain at your marginal rate. If you hold it for more than a year, it will be taxed as a long-term gain at a lower rate. These rates vary depending on your tax bracket, but they are typically 15-20%.
There are also some special rules that apply to crypto taxes. For example, if you receive crypto as payment for goods or services, you will have to pay taxes on the income just like you would for any other job. And if you move crypto from one wallet to another, that may be considered a taxable event.
Of course, none of this matters if you don’t report your crypto income to the IRS. So make sure to stay on the right side of the law and report any and all crypto transactions on your tax return.