While cryptocurrency assets are becoming more and more popular, owners and their legal advisors should be aware that the IRS and other tax authorities are also interested in these commodities. The Internal Revenue Service (IRS) hasn’t pursued cryptocurrency investors who understate their gains with much vigor up until now.

However, over 30 billion dollars was invested in the cryptocurrency market in 2022, and the worth of many well-known cryptocurrencies rose at an astounding rate. Naturally, the IRS had to step in.

Both professionals and cryptocurrency enthusiasts will need to be far more open about their cryptocurrency transactions when submitting their taxes in order to prevent any IRS issues. Accounting for an entire year of cryptocurrency euphoria may also pose some unforeseen challenges for some people.

Learning what is Taxable

The IRS views cryptocurrency assets similarly to stocks, bonds, or real estate, therefore they aren’t subject to taxes unless they are sold or otherwise utilized. These kinds of transactions may be subject to standard capital gains taxes, like long-term capital gains taxes if the cryptocurrency asset was possessed for over a year, or short-term gains in value taxes if it had been held for a shorter duration.

Similar to traditional assets, any revenue you make from cryptocurrency is subject to taxation at various rates, based on how you obtained it alongside how long you kept it. It may be taxed as revenue or capital gains. It’s critical to examine your cryptocurrency usage in order to determine whether you owe taxes.

Taxable occurrences are transactions that give rise to taxes. Events that don’t qualify like this are non-taxable. Let’s analyze them:

·        Non-Taxable Events

1. Paying for cryptocurrency and holding onto it: Purchasing and holding cryptocurrency alone is not subject to taxes. Usually, the tax is paid after you sell and your earnings are discovered.
2. Getting a gift: Unless you sell it or engage in another taxable conduct like staking, you probably won’t be taxed on cryptocurrency if you’re fortunate enough to receive it as a gift.
3. Contributing cryptocurrency to a non-profit or eligible tax-exempt charity: You might be eligible for a charity deduction if you donate cryptocurrency straight to a nonprofit.
4. Giving something as a gift: There is no tax liability on gifts of up to $15,000 per beneficiary annually, with larger amounts to partners. You must file the gift tax return if the total amount you give to each recipient surpasses $15,000. This usually results in no current tax burden. Even if you didn’t want for it to, giving cryptocurrency to a different person outside of a transaction for products or services could be considered a gift. 
5. Transferring cryptocurrency to oneself: You are not required to pay taxes on cryptocurrency transfers made between wallets and accounts you hold. To continue monitoring your possible tax impact if you eventually trade, you may have to transfer your initial cost base and date of acquisition.

·        Taxable Events

Taxable events are further divided into two categories:

1.     As Capital Gains

Selling cryptocurrency for cash: If you get more money for your assets compared to what you spent on them, you will have to pay taxes. You might be able to write off a loss on the taxes if you trade at a loss.

Using cryptocurrency to pay for products and services: For instance, if you used a bitcoin to purchase a pizza, you probably have some tax obligations. Spending cryptocurrency is similar to selling it for the IRS. Before the property can be traded for a product or service, it must be sold, and selling cryptocurrency exposes you to taxes on capital gains.

Switching from one cryptocurrency to another: Suppose you want to purchase ethereum using bitcoin, you will first need to market your bitcoin. The IRS views this as chargeable as it is an exchange of goods. If you traded your bitcoin for a greater sum than you originally paid for it, you will be taxed.

2.     As Income

Receiving cryptocurrency in return for goods or assistance: You must notify the IRS of any cryptocurrency you receive as payment for products or services.

Mining: If you mined cryptocurrency, you probably owe taxes on the profits you made, which are determined by the correct market value of the currency you produced at the moment they came in, which usually determines their price. Coins mined for business purposes are subject to self-employment taxes.

Receiving an airdrop: As a part of a promotion or giveaway, a cryptocurrency company can offer you airdrops. Receiving an airdrop is considered income and must be reported on your taxes.

Receiving payment in cryptocurrency: If your company paid you in cryptocurrency, the amount you received will be taxable as compensation based on your taxable income bracket.

Obtaining cryptocurrency through a hard fork: Your usage of the asset, when it can be withdrawn from an exchange, and other factors will all affect your taxes on that cryptocurrency.

Getting staking awards: Staking awards are taxed according to their fair market value on the day they are received, much like mining revenues. A particular note to remember with staked Ethereum is when coin base users are capable of unstaking their prizes and take possession of them, all revenue received on staked Ethereum will be treated as taxable income.

Getting other benefits or incentives: There are many more reasons why you could obtain free cryptocurrency, therefore this isn’t an exhaustive list. These can be learning prizes or incentives such as receiving $5 in bitcoin as compensation for introducing a friend to a cryptocurrency exchange. In any case, these must be reported as income.

The Bottom Line

Even Nevertheless, the tax code regarding cryptocurrencies is still changing and probably always will. The ins and outs of the constantly changing crypto tax law may seem overwhelming to those who have engaged in even a little bit of cryptocurrency trading. In the coming decades, all cryptocurrency will probably benefit from expert assistance regarding tax implications.