Cryptocurrency Tax Policy In The USA

In the USA, cryptocurrencies are considered to be assets. That’s why if you are dealing with these currencies, you need to know all the information pertaining to the tax policy. We asked CPA of Joshua Riedesel to explain the cryptocurrency tax policy in the USA.

Cryptocurrencies are treated as capital assets, so they are viewed and handled as bonds, stocks, and other investment property forms. In 2014, the IRS declared that as long as a person or a company can exchange the cryptocurrency for a fiat currency, when it comes to tax filing, they are to be considered assets.

As a result, anyone who deals with cryptocurrency trading is responsible for paying capital gain taxes. It should be noted that you can’t pay taxes with cryptocurrencies. They need to be exchanged for the fiat currencies first since it’s the only acceptable tax payment form.

Profits And Losses

Profits and losses are the easy part. They can be calculated similarly to stocks. Meaning profits and losses can occur from selling or buying goods using cryptocurrencies or trading one digital currency for another.

Capital Gains

Calculating capital gains can be done by the increase or decrease in the cost basis from the time of the purchases. Any payment made towards the purchase is called a basis. For example, if the asset is complemented by making a new purchase, the basis is determined by adding the initial cost and the costs of other purchases.

Taxable Events

A taxable event occurs when an exchange is done using cryptocurrency as a regular currency. The area may be somewhat gray. For example, IRS doesn’t provide for third-party reporting for cryptocurrencies.

Once someone withdraws the digital currency from a trading platform, the platform doesn’t have any information about the user and his or her transactions. As a result, such a transaction is considered to be a sale.

Another problem is that crypto users need to pay taxes even if they don’t cash out. For example, all transactions with cryptocurrencies are a sale, thus become taxable events. Meaning, the exchange of one digital currency to another is a taxable event as well.

Tax Implications

A cryptocurrency user must keep records of all transactions involving trades on goods and services. Each transaction has to be reported. All the transactions which involve exchanging one digital currency for another also need to be recorded and reported.

Every year, the users must report all the cryptocurrency transactions and all the gains and losses related to them. Then they must pay taxes based on the total gains.

Holding Period

This period is that time that you own the asset you purchased. Usually, it’s the period between purchasing/acquisition and a taxable event. If your holding period exceeds one year, then it’s considered a long-term gain or loss.

If you hold the assets for less than a year before a taxable event occurs, it’s classified as short-term gain or loss.

Failing To Report

Since cryptocurrency tax reporting doesn’t always seem fair (as in the case with cash outs), some people prefer not to file a report at all. Recently, IRS has been investing serious effort in cracking down on digital currency reporting.

For example, they have already forced Coinbase to share the customer records. Today IRS is making crypto reporting a high priority. That’s another reason why it’s important to report taxes on time.

Filing cryptocurrency taxes for the first time may be complicated. It may make sense to consult an expert. Once you get a hang of the process, the next year filing won’t seem as complex.


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