When are you liable for cryptocurrency tax in the USA? Simple, in any of the eight taxable events that may happen when you deal in cryptocurrencies. As per US cryptocurrency tax laws, which basically is a combined reading of the general provisions of the Internal Revenue Code and IRS Notice 2014-19 and Revenue Rulings 2019-24 along with FAQs on virtual digital assets, several taxable events may arise when you receive or transfer cryptocurrency.
This is so because IRS treats cryptocurrency as “property” for tax purposes, which means rules of recognising income or loss out of the sale, transfer, exchange, etc., shall apply. Apart from this, if you do not transfer but are a beneficiary of the crypto transfer to you, it shall also be counted for your tax liability.
List of events that give rise to cryptocurrency tax in the USA
Here is the list of taxable events that may occur when you transfer your crypto or receive cryptocurrencies :
1. Selling cryptocurrency
You may trigger a taxable event if you sell cryptocurrency to anyone, including cryptocurrency exchanges. Since IRS considers the cryptocurrency a “property” as defined in IRC 317(a), the sale may result in a capital gain or loss. Read “How is gain or loss on sale of crypto taxed ?“
2. Trading or exchanging cryptocurrency
In cryptocurrency, you can swap one crypto with another, whether or not both belong to the same blockchain network. Since “cryptocurrency is a property or asset under US tax law , exchange or barter of crypto coins will be considered as a transfer of “property ” with consequences of “capital gains” .So, the swapping of cryptocurrencies is a taxable event. To know more about the crypto swap and its taxation impact, Read “How is the trading or exchange taxed ?”
3. Receiving cryptocurrency as payment
Suppose you accept cryptocurrency as payment for goods or services. In that case, the cryptocurrency’s fair market value at receipt time is considered business income (sale turnover ) and taken for computation of profit & loss of the business. Read the post ” Receiving payments in crypto?Be ready for some complexities of reporting and loss adjustments .”
4. Mining cryptocurrency
Mining cryptocurrency is part and parcel of a blockchain network. If you mine cryptocurrency, the cryptocurrency’s fair market value at receipt is considered income and taxable. You must report the income on your tax return and pay taxes like any other income. Read the post “How mining gives rise to cryptocurrency tax in USA .”
5. Gift of cryptocurrency
Gifting cryptocurrency is subject to gift tax rules in the United States. So, if you give cryptocurrency to someone, you may be subject to gift tax if the value of the gift exceeds the annual gift tax exclusion amount. Read the chapter “How is the gift of cryptocurrencies taxed ?”
6. Staking cryptocurrency
When you stake crypto coins in any crypto exchange or with any blockchain network, you are helping them validate the ledge through -Proof of Stake-mechanism. So, the blockchain network rewards you with interest on the pooled or staked coins. This “interest ” received in crypto coins is a taxable event. IRS will regard the FMV value of the different cryptocurrencies received for staking as taxable income of the year of receipt. Read the chapter “How IRS tax staking gains ?”
7. Receipt of crypto via airdrop
Airdropping of cryptocurrencies happens all the time in the crypto world. The reason may be anything from a hard fork of the existing blockchain network to the marketing of a crypto network. When you receive cryptocurrencies in any way without paying any consideration for their receipt, such, even receipt of crypto coins without any basis shall be regarded as income in your hand. This is so per the law under Internal Revenue Code that every receipt is taxable unless otherwise provided in the IRC. IRS Revenue Ruling 2019-24 made it clear that cryptocurrencies’ Fair Market Value (FMV) shall be regarded as income in the hand of the recipient on the date and time of receipt. To know in detail, read the “How IRS tax receipt of cryptos as airdrop ?”
8. Receiving crypto coins on a hard fork of a blockchain
When a blockchain network implements a hard fork on its network, new cryptocurrencies are issued via airdrop or directly to the ledger of the existing members of the network. Such receipt of new cryptocurrencies is taxable, even similar to airdrop events. Read “How IRS tax receipt of cryptos on hard-fork ?”
Those described above, eight taxable events shall cover almost all situations in which you may be liable for cryptocurrency tax in USA .
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