It’s 2024, and cryptocurrency remains a hot topic. Bitcoin has achieved new heights, and discussions around Dogecoin have evolved beyond social media to influence major financial decisions. Understanding the tax implications is crucial as more people dive into the crypto sector. Here, we’ll delve into laws and regulations, ensuring you’re fully informed on how to navigate your crypto investments tax-wise.
How are cryptocurrencies taxed?
Cryptocurrencies are categorized by the Internal Revenue Service (IRS) as property. This means they generally fall under capital gains tax, of which there are two kinds – short-term and long-term. Your rate also varies based on your income bracket. However, some types of crypto transactions require you to pay income tax rates, such as getting paid in cryptocurrency or mining.
When do I pay taxes on cryptocurrency?
If you’ve invested in cryptocurrencies before, you probably know the general taxable events:
- Converting a cryptocurrency to your local fiat.
- Converting one cryptocurrency into another
- Any earned cryptocurrency income.
- Purchasing a good or service with cryptocurrency.
Then, we have the non-taxable events.
- If you simply hold cryptocurrencies you’ve bought.
- Transferring cryptocurrencies between wallets.
However, cryptocurrencies have developed a lot since then. Decentralized finance (DeFi) and non-fungible tokens (NFTs) are now spotlighted. If you’ve invested in either, here’s how to handle taxes:
Unpacking the tax implications for NFTs
NFT taxes are actually pretty simple. They’re taxed just like traditional crypto investments – as a property. If you invest in an NFT and sell it for a profit or a loss, you report it as a capital gain or loss. It’s that simple!
The IRS published a draft in 2022 suggesting that NFTs would be regarded as digital assets, much like cryptocurrencies. You must pay taxes if you sold, acquired, or gave away any NFTs during the tax year. NFTs are further liable to ordinary income tax and capital gains tax.
Sponsored SponsoredNote that traditional capital gains rules also apply when trading one NFT for another. However, if you’re a creator of NFTs, know that you’ll be paying income tax on your income. If anyone has paid you for art or other types of NFTs, be sure to report it as such.
Mining and staking
Miners should be aware that their rewards are technically classified as ordinary income. According to the IRS guidance for 2024-2025, staking rewards, like mining rewards, may be subject to income tax. The current guidance makes no mention of staking rewards.
However, according to IRS guidance, mining rewards are taxable as income at their fair market value on the day they are received. Mining as a business means reporting it as business income, whereas hobby mining is considered other income. Furthermore, if you later sell, trade, or spend your staking rewards, you will be subject to capital gains taxes on crypto.
Remember that many companies now accept Bitcoin and other cryptocurrencies as payment. In the same way that cash, checks, credit cards, or digital wallet payments are taxable income, cryptocurrency payments you receive in return for products or services are also taxable. For taxes on crypto reporting purposes, the amount you are paid in cash for goods or services is equivalent to the cryptocurrency’s fair market value on the day and time you received it.
Understanding taxes in the DeFi space
DeFi crypto taxes are much more complicated than NFTs, as there are many ways to get involved in the market. For example, if you have lent out any money via cryptocurrencies and received interest in return, you would report those earnings as income tax.
That said, if you’ve contributed to a liquidity pool, such as Compound, and earned their token as a reward for your contribution, you would report it as capital gains tax. That’s because you’re technically converting one token to another.
Even though there aren’t any explicit tax regulations for yield farming just yet, it is still subject to taxes. If you are farming for yield, all your income will be taxed as income. The capital gains tax will apply to any profit you make from yield farming.
Remember it this way. If you acquire a new type of cryptocurrency, AKA a conversion, it’s likely a capital gains tax. If you’re earning on your invested asset, without it turning into another crypto, the transaction more likely to be an income tax.
On the other side of things, if you take out a cryptocurrency loan, you actually don’t have a taxable event on your hands. As of this writing, there’s no regulation on the interest you pay back on said loan. In fact, you can potentially use these transactions in a tax-deductible way. This may change in the future, though, as crypto regulations ramp up in the United States.
How do I pay taxes on cryptocurrencies?
Unlike in the traditional tax space, paying taxes on cryptocurrencies can be very confusing. Even if you buy on an exchange like Coinbase, the platform can’t necessarily send you transaction reports.
This is due to the inherent nature of digital assets. You’re sending cryptocurrencies everywhere, and an exchange doesn’t always know when you acquired them and at what price.
Sponsored SponsoredSure, if you do all of your buying, selling, and converting on Coinbase, they can track the activity accurately. However, almost nobody sticks with one exchange, and it’s safer to move your funds off of an exchange wallet if holding.
Instead, record every transaction you make, noting the cost at the time of purchase and any gains or losses upon sale. Tracking your transactions is made easier with cryptocurrency tax software.
Adding to the relevance of meticulous record-keeping, in 2024, Florida has earned the title of “Best State for Crypto Taxes” in the U.S., thanks to its absence of state income tax and crypto-friendly regulatory policies, which include a pilot program allowing state fee payments in crypto.
Crypto taxes in the U.S. are ambiguous
According to existing guidance, crypto may often be subject to income tax. Furthermore, if you later sell, trade, or spend your staking rewards, you may have to pay capital gains taxes on crypto. Many people have said that this stance is unjust. The IRS has stated that cryptocurrencies are considered and taxed as property.
Many believe taxing mining and staking rewards as income is incompatible with this viewpoint. Nonetheless, that’s about it regarding new types of cryptocurrency taxes. Again, if you’re entirely new to crypto, combine this information with the previous article if it applies to you.
