Cryptocurrency has recently been gaining popularity as an investment option, with people mining, trading, and earning crypto through various means. However, as the IRS (Internal Revenue Service) classifies cryptocurrency as property, it is subject to tax regulations just like any other property.
This means that crypto earnings, whether from mining or trading, must be reported and taxed appropriately. In this blog, we will dive into the IRS tax implications of crypto income, helping you understand what you need to know to stay compliant.
What is considered Crypto Income?
The IRS considers cryptocurrency income to include:
- Proceeds from mining operations
- Trading or selling cryptocurrency for a profit
- Earning cryptocurrency through staking or lending
- Receiving cryptocurrency as payment for goods or services
Taxation on Crypto Mining
If you are mining cryptocurrency, you must report the fair market value of the coins at the time they were mined as taxable income. If you don’t know much about tax laws, you can hire a professional tax expert (like the best tax lawyers).
The cost of mining equipment and electricity used in the mining process can be deductible as a business expense. If you are mining as a business, you will also need to pay self-employment taxes on your mining income.
Taxation on Crypto Trading and Sales
The IRS views cryptocurrency trading as taxable, meaning you must report any profits from buying and selling cryptocurrency as taxable income. Get a professional (like an IRS tax lawyer) to learn more about IRS tax rules. The cost of purchasing cryptocurrency is considered a “tax basis,” which is used to determine the capital gain or loss when the cryptocurrency is sold.
If you have held the cryptocurrency for less than a year, any profits will be taxed as short-term capital gains at your ordinary income tax rate. If you have held the cryptocurrency for over a year, profits will be taxed as long-term capital gains at a lower tax rate.
Record Keeping for Crypto Taxes
The IRS requires that you keep detailed records of all cryptocurrency transactions, including the date of purchase, date of sale, cost basis, and sale proceeds.
Accurate record-keeping is essential for determining your capital gain or loss and for calculating your taxable income from cryptocurrency. Hiring a professional tax expert (like a crypto tax lawyer) can help you.
Using cryptocurrency tax software, such as CoinTracking or BlockFi, is a good idea to help you track your cryptocurrency transactions and calculate your taxable income.
Conclusion
Cryptocurrency is becoming increasingly popular as an investment option, and it is important to understand the IRS tax implications of your crypto income. Whether mining, trading or earning crypto through staking or lending, you must report and pay taxes on your crypto earnings.
Accurate record-keeping and understanding cryptocurrency tax laws can help you stay compliant and avoid any potential penalties from the IRS. As always, consulting a tax professional for personalized advice on your situation is a good idea.
