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For US tax purposes, they treat digital assets as property, not money. Allowing you to buy, sell, own, transfer, or trade them. Then store them electronically.
Any digital representation of value stored on a distributed ledger (blockchain) that uses cryptography for security, or on similar technology, qualifies as a digital asset for tax purposes.
Examples of Digital Assets
- Non-fungible tokens (NFTs)
- Stablecoins
- Cryptocurrencies and convertible virtual currencies, such as Bitcoin
How Digital Assets Are Used
Convertible virtual currency, like cryptocurrencies, is any digital asset that can be exchanged for real money. Or that has a value equivalent to real money. It might be:
- Digitally traded
- Used in exchange for services and goods
- Converted into or exchanged for digital assets or currencies
You have to select “Yes” or “No” for the following digital asset question on your federal tax return:
At any time during the tax year, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?
Digital Assets Tax Law in the US
The Internal Revenue Service (IRS) treats cryptocurrencies as property. This means that general tax principles applicable to property transactions apply to digital assets. Key points include:
- Capital Gains Tax: Profits from selling cryptocurrencies are subject to capital gains tax. The rate depends on the holding period (short-term vs. long-term) and the individual’s overall income.
- Ordinary Income Tax: Income from mining, staking, airdrops, and payments received in cryptocurrency are subject to ordinary income tax rates.
- Record-Keeping: The IRS requires meticulous record-keeping of all transactions, including dates, values, and their nature.
General Tax Rules Applicable on Cryptocurrency
As a guiding principle for federal taxes on virtual currency transactions, they treat virtual currency as property. This means taxpayers receiving virtual currency for goods or services recognize income equal to the fair market value of the virtual currency, expressed in US dollars. In the same way, if the fair market value of the property obtained differs from the virtual currency’s adjusted basis, the taxpayer who exchanges the virtual currency for the property will either earn or lose money.
When a taxpayer receives virtual money as a legitimate gift, income is not recognized until the taxpayer exchanges, sells, or otherwise gets rid of the money. If the taxpayer loses or gains on the next disposition of the currency, the following results determine the taxpayer’s basis in the currency:
- The donor’s basis plus whatever gift tax paid on the gift equals the taxpayer’s basis for calculating whether the taxpayer has a gain.
- The foundation for assessing if the taxpayer has incurred a loss is equivalent to the lower of the virtual currency’s fair market value at the time of the gift or the donor’s basis.
- The taxpayer’s basis is zero if they lack any supporting documents for the donor’s basis.
The day the taxpayer gets the cryptocurrency is usually when the cryptocurrency’s holding period begins. On the other hand, if the taxpayer gets it as a gift, they include the donor’s holding period with the taxpayer’s holding period. If the taxpayer is unable to provide documentation of the donor’s holding term, their holding period also begins the same day when they get the currency.
Capital Gains Tax
Revenue has made it clear that profits or losses on cryptocurrency assets that do not fall under trading profits are often subject to taxation as chargeable gains or permitted losses for individuals and businesses.
Agents need to exercise caution when trading one cryptocurrency asset for another. Selling a cryptocurrency asset — whether for standard money or cryptocurrency asset — can cause a gain or a loss.
It could be feasible to make a loss claim in some situations where a cryptocurrency asset has decreased in value. Revenue will probably not accept a tax claim for loss in such a situation, but just because an owner misplaces their private key and is unable to access the crypto asset does not necessarily mean it is worthless.
VAT
Supplies of Services/Goods
For suppliers of any services or products sold in return for any cryptocurrency asset, VAT is due in a regular manner. The crypto asset’s euro value at the time of issuance will be the taxable amount.
Crypto Mining
Because crypto mining does not qualify as an economic activity under VAT, income from mining operations is typically exempt from it.
Staking Rewards
Staking involves holding funds in a cryptocurrency wallet to support the operations of a blockchain network. The IRS has indicated that staking rewards are also considered taxable income.
Airdrops and Hard Forks
An airdrop is when digital assets are distributed to holders of an existing blockchain. The IRS considers the value of the airdropped assets as taxable income. A hard fork is a change in blockchain protocol that splits the chain into two. If a hard fork results in a new cryptocurrency, the value of the new currency received is considered taxable income.
Tips for Lowering Your Digital Assets Tax
- You can lower your taxable income by offsetting capital gains from various investments with losses you have incurred from investing in digital assets.
- Holding onto digital assets for more than one year can result in lower tax rates on long-term capital gains compared to short-term gains.
- You can gift digital assets to others. If the gift is below the annual exclusion limit ($15,000 per recipient for 2023), it is not subject to gift tax.
Making tax decisions for cryptocurrency assets can be challenging, so having some knowledge of them is undoubtedly advantageous. Avoid tax headaches on your digital assets! Stay informed, keep good records, and consult a professional.
There isn’t much publicly available guidance on cryptocurrency asset taxation, with the exception of Revenue’s basic instruction. More advice from Revenue on various issues would be helpful. Such as how initial coin offerings are taxed and whether non-domiciled people can use taxation’s remittance basis on cryptocurrency assets.
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