Filling cryptocurrency tax in the US requires a lot of care to avoid getting on the wrong side of the law. But it all boils down to good record-keeping practices, filling of the correct IRS tax forms, and the ability to distinguish what income qualifies as an income and what qualifies as capital gains.
Currently, all cryptocurrency activities in the US are taxable and if you are a crypto investor or trader in the US, you have to familiarize yourself with how the various crypto activities are taxed. Failure to do so may land you into hot soup.
When is crypto income is treated as capital gains?
The following crypto activities attract capital gains taxes in the US:
- Converting cryptocurrency to fiat currency
- Converting one cryptocurrency to another cryptocurrency
- Using cryptocurrencies to purchase goods and pay for services
The tax rate will depend on how long you hold the cryptocurrency. Short term trades or crypto activities (those activates that take place within a period of less than a year) attract an individual income tax rate that depends on the federal income tax bracket of the individual.
Long term trades or crypto activities (activities that take over a year like holding a cryptocurrency for over a year) attract lower tax rates which can range from 0 to 20 depending on the federal income tax bracket of the individual.
It is therefore important to know which tax bracket you fall in to be aware of the rate at which you shall pay the income gains tax.
Tax brackets in the US
The tax brackets and rates are revised yearly and it is important to also keep a brace with the current tax rate brackets.
Below is a breakdown of 2021 tax brackets for US residents:
Single filers tax brackets
Tax brackets for married and filing tax jointly
Tax brackets for married and filing tax separately
Tax brackets for household heads
When is crypto income is treated as income?
The following crypto activities are classified as income-generating activities:
- Crypto earnings from cryptocurrency mining
- Crypto earnings from liquidity pools
- Crypto earnings from node staking
- Crypto earnings from block validations
- Crypto earnings from DeFi protocols
- Receipt of crypto payments after selling goods or offering services
- Crypto airdrops
- Crypto awards
- Staking rewards
- Bug bounties
- Crypto giveaways
The income from any of the above activities is taxed at the same rate that the individual pays on other incomes he/she receives annually.
Keeping records of all crypto transactions
When filing tax for cryptocurrency activities, you will be required to combine all the transactions within one report. This may be difficult in some cases because different crypto platforms use different formats.
You should account for all the fees of all the transactions. Also if the fee was paid in crypto, you should account for the capital gain or loss incurred on the fee itself.
Filing the correct tax form
For capital gains taxes, you are required to file Form 8949 and Schedule D.
For income tax returns, you should file Form 1040 (Schedule 1)
It is important to note that it is possible to be required to fill all the files depending on the type of crypto activities you involved yourself with.
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