Blog
- January 2, 2024
Navigating Cryptocurrency Taxation in the USA
In recent years, cryptocurrency has transformed from a niche interest into a mainstream financial asset. The number of people trading and investing in Crypto has skyrocketed. But with this surge in popularity, there is also a rise in complications and confusion related to its taxation.
Investors and traders need to understand these taxation norms to stay safe from any potential legal troubles. So, we decided to come up with this quick guide on Crypto taxation. We will also take a look at how these transactions are taxed and what regulations you have to comply with. But first, let’s start with the basics.
The Basics of Cryptocurrency Taxation
The most important thing to keep in mind here is that the IRS treats cryptocurrencies as property and not currency. So whether you buy, sell, or invest in crypto it will be taxed accordingly. Here’s how the taxation applies to Cryptocurrencies:
Trading and Investing
Just like with standard Properties, the capital gains from Cryptocurrencies are categorized into two parts and taxed accordingly.
Capital Gains Tax: Profits from selling or trading cryptocurrencies are subject to capital gains tax.
Short-Term vs. Long-Term: Gains on assets held for less than a year are taxed as short-term capital gains, which are subject to the same tax rates as ordinary income. Assets held for more than a year are subject to long-term capital gains tax, which has lower rates.
Using Cryptocurrency for Transactions
When you use cryptocurrency to purchase goods or services, it’s treated as a sale of property, potentially resulting in a capital gain or loss.
The gain or loss is calculated based on the difference between the crypto’s value when you acquired it and when you used it in a transaction.
How to Gains and Losses in Crypto Transactions?
Calculating Gains or Losses in Crypto Transactions is not that complex. Just subtract the cost basis (the original value of your crypto purchase, including fees) from the sale price. For instance, if you bought Bitcoins worth $1,000 and sold them later for $1,500, your capital gain would be $500. See? Calculation is not that complex, but the complexity lies in income reporting and compliance. That’s why we strongly recommend connecting with experts for cryptocurrency taxation.
Reporting Requirements
Form 8949 and Schedule D
Any capital gains or losses from cryptocurrency transactions must be reported on Form 8949 and transferred to Schedule D of your tax return.
Form 1099
If you use a cryptocurrency exchange, you might receive a Form 1099-K or 1099-B. This will have all the details of your transactions. But the thing is, it’s your responsibility to report all transactions, even if you don’t receive these forms.
That’s where the need for experts like CROWNGLOBE appears. We handle a lot of clients, individuals, and corporations who are dealing with cryptocurrency transactions. Here are a couple of case studies of our clients that will help you gain a better context of how we do things at CROWNGLOBE.
How CROWNGLOBE is helping Businesses and Individuals tackle the crypto taxation challenge?
Case Study 1:
We have a leading tech company based in California that has significant investments in digital currencies.
Last year, they had a diversified cryptocurrency portfolio worth $10 million. On top of that, they were engaged in active trading that totaled $4 million in sales and $3 million in purchases over the year. They faced the challenge of accurately calculating the tax on their $1 million net capital gains. They were also not sure about the IRS reporting regulations and compliances.
CROWNGLOBE's Strategic Approach
Tax Liability Calculation:
We determined that their capital gains were subject to the short-term rate of 37%, amounting to a tax liability of $370,000.
Ensuring Compliance:
To streamline our client’s reporting process, we introduced them to Form 1099-DA, designed specifically for reporting digital asset transactions.
Additionally, we ensured compliance with the requirement to report transactions over $10,000, a critical aspect given the high volume of their trading activities.
Result
Our intervention helped this Tech firm calculate the accurate tax liability. We also helped them streamline their reporting process, ensuring full compliance with IRS regulations.
Case Study 2:
We recently helped an individual trader, who delved into the world of digital currencies with significant investments and active trading.
Background of the Trader
An individual investor, started trading in cryptocurrency in 2021. Over the year, his activities included:
Cryptocurrency Portfolio: A trader started with an investment of $500,000 in various cryptocurrencies.
Trading Activity: He was engaged in active trading, with $2 million in sales and $1.5 million in purchases.
Net Capital Gains: Overall, his realized net capital gains stood at $200,000.
He had made good profits but faced the daunting task of staying compliant with the complex U.S. tax system. His biggest issue was the calculation of tax liability and adhering to IRS reporting regulations.
CROWNGLOBE's Strategic Approach
Tax Liability Calculation:
Given that his trading activity fell within a one-year frame, his gains were classified as short-term capital gains.
At a short-term capital gains rate equivalent to his income tax bracket, which was 32%, the tax liability on his gains amounted to $64,000 (32% of $200,000).
Ensuring Compliance:
We assisted trader in understanding the importance of Form 8949 for reporting capital gains and losses from his cryptocurrency transactions.
We also advised on the use of Form 1099-DA, which is particularly relevant for individuals engaged in frequent and high-value cryptocurrency transactions.
Result
Our comprehensive approach resulted in accurate tax calculations and ensured that his reporting process was streamlined. We also ensured he stayed fully compliant with the latest IRS regulations.
In a nutshell, we have expertise in handling all types of crypto-related taxation issues. Now, let’s take a look at some recent regulatory updates on Cryptocurrency
Recent Regulatory Updates
Increased Scrutiny and Reporting
As the Crypto Market is growing, the IRS has increased its scrutiny of crypto transactions. IRS is introducing new regulations and reporting requirements to ensure compliance
Potential Future Changes
Cryptocurrency taxation is evolving consistently. The government and IRS are taking cognizance of new challenges and are creating laws accordingly. So it’s important to stay updated.
Wrapping up
Cryptocurrency taxation might feel a bit challenging for individuals and businesses alike. There are different compliances that need to be followed, and hence it’s always better to consult an expert. While crypto offers exciting opportunities, it also comes with its own set of tax responsibilities that should not be overlooked. For more information on the topic, feel free to talk to our experts. We are always here to help.
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