Tax Season Must-Read | Do You Need to Pay Taxes on Cryptocurrency Investments in the U.S.?
Every tax season, many U.S. residents who invest in cryptocurrencies find themselves stressed out: Do they need to pay taxes? How should they pay them? A small mistake could not only lead to fines but also trigger an audit by the IRS (Internal Revenue Service). Don’t worry! This article will outline 6 key points about cryptocurrency taxation in the U.S., helping you navigate tax season with ease.
1. Cryptocurrencies Are Taxable in the U.S.
According to the IRS Notice 2014-21, issued in 2014, all cryptocurrencies are considered property rather than currency. Cryptocurrency transactions are subject to taxes and follow the general tax rules for property transactions. This means that whether you’re buying and selling BTC through an exchange or using ETH to purchase real-world goods, taxes may be due. Depending on the type of transaction, you may need to pay income tax or capital gains tax on cryptocurrency transactions.
2. Five Situations Where You Need to Pay Income Tax
U.S. personal income tax is a direct tax on the worldwide income of U.S. citizens, residents, and non-residents, and is levied at the federal, state, and local levels. The taxable scope of state and local personal income taxes depends on where you live. For federal personal income tax, the IRS specifies that the following cryptocurrency transactions are subject to income tax rules:
● Receiving cryptocurrency from an airdrop.
● Cryptocurrency income from DeFi lending.
● Mining income from block rewards and transaction fees.
● Earning cryptocurrency from liquidity pools and interest-bearing accounts.
● Receiving cryptocurrency as wages or compensation.
Additionally, if you obtain cryptocurrency through methods such as forks, staking, or the above channels, you generally need to include the fair market value of the asset at the time of acquisition in your cost basis and pay the corresponding income tax. The calculation of income tax on cryptocurrency can be complex since U.S. federal income tax rates range from 10% to 37% (for 2024), depending on your tax filing status and overall income.
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3. Four Situations Where You Need to Pay Capital Gains Tax
Capital gains tax is levied on the profit from the sale of an asset. Therefore, you only need to pay capital gains tax when you sell or are considered to have sold cryptocurrency. Specifically, the following cryptocurrency transactions are subject to capital gains tax:
● Converting cryptocurrency into fiat currency.
● Donating cryptocurrency.
● Using cryptocurrency to purchase goods or services.
● Exchanging one cryptocurrency for another.
It’s important to note that the last scenario, cryptocurrency reinvestment, is also subject to capital gains tax. The IRS typically treats “reinvestment” as a “sale.” For example, if you buy 1 BTC for $60,000 and then exchange it for SOL when its market value reaches $65,000, you will still need to pay taxes on the $5,000 profit, even if you didn’t withdraw the profit into a fiat account.
4. Two Situations for Tax Benefits
When engaging in cryptocurrency transactions subject to capital gains tax, you need to subtract the cost basis from the sale price to calculate the capital gain or loss and pay capital gains tax accordingly. If you meet the following conditions, you can enjoy tax benefits related to capital gains tax:
Situation 1: Long-Term Holding and Sale of Cryptocurrency, Eligible for Lower Tax Rates
If you hold cryptocurrency for more than a year before selling it, you can benefit from a lower long-term capital gains tax rate. This is because U.S. tax law applies different tax rates to short-term and long-term capital gains:
● Short-term capital gains tax (holding period ≤ 1 year): The tax rate is the same as ordinary income tax, with a maximum rate of 37%.
● Long-term capital gains tax (holding period > 1 year): The tax rates are divided into 0%, 15%, and 20%.
Situation 2: Lower Tax Rates Based on Your Total Income
The specific tax rate for long-term capital gains also depends on your total income and tax filing status. If your income falls below a certain threshold, you can enjoy a lower tax rate or even be exempt from paying taxes on long-term capital gains.
For example, if you are single and your income for 2024 is below $47,025, you will not need to pay long-term capital gains tax. However, it’s important to note that even if you qualify for the 0% rate, you are still required to report your related transactions to the IRS.
5. Four Situations Where You Don’t Need to Pay Taxes
Situation 1: Gifting Cryptocurrency Below $18,000
In 2024, U.S. taxpayers have an $18,000 gift tax exemption. You can gift multiple amounts of cryptocurrency to different individuals as long as the total value is under this limit, and these gifts will be tax-exempt.
Situation 2: Simply Holding Cryptocurrency
If you are merely holding cryptocurrency (i.e., not engaging in any transactions, transfers, or conversions), it will not trigger any tax obligation.
Situation 3: Purchasing Cryptocurrency with Fiat Currency
When you buy cryptocurrency directly with USD or another fiat currency, the IRS considers this an initial investment and not a taxable event.
Situation 4: Transferring Cryptocurrency Between Wallets You Control
Transferring cryptocurrency from one wallet or account you control to another does not trigger any tax obligation. This is essentially an internal asset reallocation.
It’s important to note that “hidden tax issues” may arise when transferring assets. For example, if you transfer BTC between wallets and pay a transfer fee in cryptocurrency, the fee is considered a “sale of cryptocurrency,” meaning you may need to calculate capital gains or losses on the fee, even though the transfer itself between wallets is tax-free.
6. Simplify Your Tax Filing Process with FinTax
Typically, you need to follow these steps for tax filing:
● Confirm which cryptocurrency transactions are taxable and which tax type applies.
● Calculate the time, profits, losses, and income for each cryptocurrency transaction.
● Report income and capital gains using the appropriate forms. Depending on the situation, you may need to fill out tax forms. Income tax is typically reported via Form 1040 or Form 1040 (Schedule 1); capital gains tax is reported using Forms 8949 and 1040 (Schedule D). Additionally, if you gift cryptocurrency, you may need to file Form 709.
In practice, cryptocurrency tax filing can be overwhelming, especially with frequent and complex transactions. Manual filing is prone to errors. You can consult a professional accountant, but we recommend using FinTax for a low-cost, high-efficiency solution. As the largest on-chain tax filing platform, FinTax offers a one-stop solution for your cryptocurrency taxes:
● Automatically Import Transaction Records: FinTax integrates deeply with the industry, allowing you to import transaction records from over 40 exchanges and 70 chains by simply entering your address, and generate dashboards.
● Generate IRS-Compliant Forms in 10 Minutes: Unlike traditional tax filing, which is complex and time-consuming, FinTax automatically generates crypto tax reports based on your country and region, helping you file your taxes in just 10 minutes.
● Accurately Calculate Capital Gains and Losses: FinTax’s tax calculations are verified by a professional tax team and are updated in real-time to align with the latest tax laws.
