7 Quick Bytes on Taxation of Cryptocurrencies in USA
Under the Internal Revenue Code, cryptocurrencies are digital assets and are treated as “property”. This post is excerpt from my newest book “crypto taxation in USA”
What is a Digital Asset?
Section 6045(g)(3)(D) of the Internal Revenue Code defines the term “digital asset” as a digital representation of value recorded on a cryptographically secured distributed ledger or any similar technology. So, a digital asset for tax laws in the USA means to include (but is not limited to):
- Convertible virtual currency and cryptocurrency
- Stablecoins
- Non-fungible tokens (NFTs) .
The digital asset is treated as “property” under IRC , following legal facts affect your crypto holdings and transactions :
1.The sale or exchange of digital assets held as an investment will give rise to Capital Gains and Losses.
In the US, cryptocurrencies are treated as property. Therefore, if you held the digital assets as investment, the sale or exchange of digital assets will be subject to capital gains taxes. If you sell, trade, or otherwise dispose of your cryptocurrency for more than you acquired it, you must pay capital gains tax on the difference. Similarly, if you sell for less than you acquired it for, you may be able to deduct the loss.
2. Selling cryptocurrencies held as stock-in-trade gives rise to ordinary income.
If you are in the trade or business of dealing in cryptocurrency, selling or exchanging cryptocurrency will give rise to ordinary gain or loss. Remember, capital gains on the sale or exchange of cryptocurrencies arise when you hold it as an investment.
3. Receiving the property is ordinary income as per IRC § 61).
If you receive cryptocurrency as compensation for goods or services, it is treated as ordinary income. This applies whether you’re an individual or a business. The fair market value (FMV) of the cryptocurrency in US dollars as of the date of receipt of digital asset is the income.
4. Gift of digital assets is liable to Gift Tax as per IRC 2501.
You will be liable to gift tax if you gift cryptocurrency valued more than the annual gift tax exclusion amount ($17,000 as of 2023).
5. Reporting Foreign Accounts if you hold digital assets.
Holding more than $10,000 in foreign cryptocurrency exchanges?You must file Form 8938 or FinCen Form 114a Report of Foreign Bank and Financial Accounts (FBAR).
6. Report requirements by business on cash receipts
If a business receives $10,000 or more in cash in a transaction, it must report the transaction to the IRS on Form 8300. This rule has been extended to cryptocurrency transactions, so businesses that accept payments of $10,000 or more in cryptocurrency must also report that to the IRS.
7. Record keeping Requirements for property as per 26 USC § 6001).
Like any other type of property (capital asset ), you must keep records of your cryptocurrency transactions to calculate your tax liability accurately.
Excerpt From my Book “Crypto Taxation in USA: A Comprehensive Guide to Navigating Digital Assets and Taxation”. Amazon Kindle edition
Copyright : Prashant Thakur:
