Tax Season Must-Read | U.S. Taxpayers, Take Note: These 4 Types of Crypto Income Are Also Taxable!
The U.S. tax season is around the corner! If you’re a U.S. taxpayer and engaged in cryptocurrency transactions over the past year, it’s crucial to accurately report your crypto income. FinTax highlights four commonly overlooked or mishandled types of crypto income to help you navigate the tax season with ease!
1. Airdrop Income
Crypto airdrops are a popular way to promote digital assets and build communities. Many crypto investors have received airdrops, but do you know how to report and pay taxes on this income?
Ordinary Income Tax: In the U.S. and many other countries, airdrops are treated as a form of bonus income, making them subject to ordinary income tax. The IRS explicitly states that airdrop income must be reported using the fair market value (FMV) of the assets on the day they were received. This income should be reported on Form 1040, Schedule 1, as “Other Income.”
Capital Gains Tax: When you sell assets received via airdrops, you may also need to pay capital gains tax. Similar to other assets, the capital gain is calculated by subtracting the cost basis (FMV on the date of receipt) from the sale amount. Report these gains on Form 8949.
2. Mining Income
Cryptocurrency mining also involves both ordinary income tax and capital gains tax:
Ordinary Income Tax: The crypto assets you earn from mining are considered taxable income at the time they are received, creating a tax liability immediately.
Capital Gains Tax: Mining income is also subject to capital gains tax when the mined assets are sold. The tax rate depends on how long the assets are held. Short-term capital gains (held less than one year) are taxed at the same rate as ordinary income, ranging from 10% to 37%. Long-term capital gains (held for more than one year) benefit from lower tax rates, ranging from 15% to 20%.
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3. Staking Income
In the crypto world, “staking” has two distinct meanings:
● Consensus Mechanism Staking (e.g., Proof of Stake – PoS): Staking in PoS is akin to entering a lottery. Token holders “stake” their tokens in the network to increase their chances of being selected as blockchain validators (winning the “lottery”). The more tokens staked, the higher the chances of earning block rewards.
● DeFi Staking: This involves locking your crypto assets in a DeFi protocol (e.g., liquidity pools or lending platforms) to earn rewards. This functions similarly to traditional lending arrangements, where you provide funds to others on-chain and earn interest in return.
In July 2023, the IRS updated its guidelines to clarify the tax treatment of staking rewards. The guidance states that staking rewards constitute taxable income at the time of receipt rather than upon sale, as receipt means the rewards are unlocked and the staker has full control over their disposal.
4. Gift Income
When dealing with crypto gift income, U.S. taxpayers may need to file Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return. The following scenarios illustrate gift-related tax considerations:
● Receiving Gifts: If you receive crypto as a gift from a friend, you won’t owe taxes until you sell the crypto or use it in other taxable activities (e.g., staking).
● Gifting Crypto to Others: You can gift up to $15,000 per year (per individual) tax-free (higher limits apply for spousal gifts). If the value of your gift exceeds this limit, you must file Form 709 to report it. Note that even unintentional gifts, such as transferring crypto without receiving goods or services in return, may be classified as gifts.
Navigating complex tax rules for crypto income can feel overwhelming. Are you struggling to calculate your crypto gains accurately or worried about correctly reporting your crypto tax information?
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