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How Crypto Is Taxed in the United States

With the ever-growing popularity of cryptocurrencies, there's been an increased focus on understanding the tax implications associated with crypto assets in the U.S.
Steven Aguiar
August 28, 2023

With the ever-growing popularity of cryptocurrencies, there's been an increased focus on understanding the tax implications associated with crypto assets in the U.S. For investors, traders, and enthusiasts alike, it's vital to have clarity on the tax rules governing these digital assets. This guide dives deep into the nuances of crypto taxation in the United States.

1. Cryptocurrency is Considered Property

In the eyes of the Internal Revenue Service (IRS), cryptocurrencies are classified as property. This means that capital gains and losses rules apply when you dispose of your cryptocurrency. Whether you're selling Bitcoin for dollars, exchanging Ethereum for another cryptocurrency, or using crypto to purchase goods or services, these are considered taxable events.

2. Reporting Your Transactions

Every crypto transaction must be reported on your annual tax return. This includes buying, selling, mining, and even earning crypto as income. To ensure accuracy, it's recommended to maintain detailed records of all your crypto transactions, noting the date, amount, and the asset's fair market value at the time of the transaction.

3. Tax Rates on Cryptocurrency

Crypto gains and losses are divided into short-term and long-term based on the duration you hold the asset:

  • Short-term: Assets held for less than a year are taxed as ordinary income, which ranges from 10% to 37% based on your income bracket.
  • Long-term: Assets held for more than a year benefit from a reduced tax rate, ranging from 0% to 20%, again depending on your income level.

4. Mining and Staking

If you mine or stake cryptocurrencies, any earned coins are regarded as income and must be reported. The value is determined by the coin's fair market value at the time of receipt. Further, when you eventually sell or use the mined or staked coins, capital gains or losses will apply.

5. Crypto Gifts and Donations

Gifting cryptocurrency is non-taxable for the giver unless the gift surpasses the annual gift tax exclusion ($15,000 as of 2021). For the recipient, there's no immediate tax. However, when they sell or exchange the gifted crypto, they must consider the giver's original cost basis for calculating capital gains or losses.

Charitable contributions with cryptocurrencies can offer significant tax benefits. If you donate your cryptocurrency to a qualified nonprofit, you can avoid capital gains tax and potentially deduct the donation's value from your taxable income (subject to certain limitations).

6. Crypto Losses

If your crypto investments face a downturn, you can offset other capital gains with your losses. The IRS permits a deduction of up to $3,000 per year for net capital losses against other types of income.

7. Beware of Tax Evasion

The IRS is taking steps to ensure taxpayers report their cryptocurrency transactions. Failing to report can lead to penalties and potential legal consequences. It's essential to be transparent and accurate in your reporting. There are many legal ways to lower your crypto tax bill.

Final Thoughts

Understanding crypto tax regulations can be challenging, but it's crucial for compliance and making informed financial decisions. As the realm of cryptocurrency continues to evolve, it's essential to stay updated on the latest tax guidelines. There is lots of crypto tax software solutions that can make this process easier.

At Givepact, we're committed to bridging the world of crypto and philanthropy. Remember, by donating crypto directly to nonprofits or setting up a donor-advised fund, you can potentially lower your tax liability while supporting causes close to your heart. Explore Givepact today and make an impact with your crypto assets!

Disclaimer: This post is for informational purposes only and is not intended as tax, legal, or financial advice. Always consult with a tax professional regarding your specific circumstances.