Know How Taxation Works in Crypto Transfers Through Many Wallets

When dealing with money, tax is one major factor that everyone thinks about. The concept has been around for hundreds of years in our centralized economy. Several factors determine whether something will be taxed or not. The parameters differ on a case-to-case basis. However, the golden rule is that if anything is considered as money, it is probably taxable.

Cryptocurrency, which isn’t a legal tender yet, also comes under the ambit of taxation. After all, they have gained immense value and market capitalization. People have made profits worth millions of dollars by trading with them. Thus, it’s no big surprise that profits gained by crypto trading are taxable. For investors, it is essential to know about taxation in cryptocurrency thoroughly.

So let’s get into it and see how digital assets are taxed.

Delve Into Crypto Taxes

The taxpayers in the United States have to report their income, payments, conversions, and sales from crypto. The Internal Revenue Service (IRS) and state tax authorities take all such information from them. Investors must understand that the US regulators consider crypto as a digital asset. They treat them with the likes of stocks, bonds, commodities, etc.

Hence, the taxation of capital gains or income is implemented on cryptos as well. However, their rates could differ on various factors like source and duration of obtaining the asset.  The regulators have clearly mentioned them in the guidelines. So, crypto users should know them thoroughly before starting to trade.

Crypto Taxable as Income

Crypto Payments- If an individual receives cryptocurrency as a form of payment from their employers, it would be taxable.

Crypto in Exchange of Goods/Services- If an individual receives crypto as a payment for goods or services, they’ll have to report it to the IRS.

Mined Crypto- If one engages in crypto mining, they’ll have to pay taxes on that earning. The amount of tax will be determined by the fair market value of mined coins. It doesn’t matter if the crypto is mined for business or self-employment.

Staking Rewards- Staking rewards are treated as income generated from mining. Therefore, stakers have to pay taxes on them based on their market value. Notably, income earned on staked ETH is also taxable.

Additional income- Crypto holders may earn rewards for any particular act, like holding a certain token. The authorities bring that also under the taxable income.  

Crypto From a Hard Fork- Crypto obtained from a hard fork also gets taxed. However, it depends on some factors and users have to check them in the IRS guidelines.

Crypto Airdrop- Many crypto users receive airdrops from new projects. It’s kind of a giveaway campaign used to promote a blockchain-based startup. Since these tokens have value, they are taxable. 

Incentives or Rewards- Digital assets users get rewards and incentives for many reasons. They may get it for contributing to a community or for participating in some competition. The tokens won from such events are taxable.

Crypto Taxable As Capital Gains

Crypto Sales for Cash- If someone’s selling crypto in exchange for dollars, they’ll have to meet their obligations. Yet, it’s applied when the individual makes profits. In case of losses, they may deduct the lost amount from taxes.

Conversion of Crypto- The conversion of one crypto in exchange for another is typically considered a sale. Since users do that mostly for making profits, they pay taxes on them. 

Buying Goods/Services With Crypto- The IRS considers spending on crypto as an act of selling since users have to sell their crypto before exchanging it for any good or service. 

Non-Taxable Crypto

Just Buying & Holding- If someone just buys crypto with cash and hasn’t sold it yet, they’re not eligible for tax. It is implemented only when the asset is sold and the gain is registered.

Donations To Tax-Exempt Body- Donations made in cryptos to charitable organizations recognized under 501 (c) (3) aren’t taxable. In fact, the charity donors may claim a charitable dedication. 

Receiving a Gift- Crypto as a gift is taxable only when the receivers use them in sales or other activities. If they just decide to keep it, then it doesn’t come under tax brackets.

Giving a Gift- As long as the crypto gift amounts to $15,000 per recipient per year, there’s no tax. When the amount exceeds the limit, then they’ll have to file tax returns. Moreover, if someone’s gifting them to their spouses, the ceiling is higher. 

Transfer to Oneself- If a user transfers their cryptos from one wallet to another, they don’t pay taxes on them.  

For calculating taxes on crypto, users can use various resources that are easily available online. To be sure, however, it’s recommended to consult with a tax professional. 

Adarsh Singh is a true connoisseur of Defi and Blockchain technologies, who left his job at a “Big 4” multinational finance firm to pursue crypto and NFT trading full-time. He has a strong background in finance, with MBA from a prestigious B-school. He delves deep into these innovative fields, unraveling their intricacies. Uncovering hidden gems, be it coins, tokens or NFTs, is his expertise. NFTs drive deep interest for him, and his creative analysis of NFTs opens up engaging narratives. He strives to bring decentralized digital assets accessible to the masses.Adarsh Singh is a true connoisseur of Defi and Blockchain technologies, who left his job at a “Big 4” multinational finance firm to pursue crypto and NFT trading full-time. He has a strong background in finance, with MBA from a prestigious B-school. He delves deep into these innovative fields, unraveling their intricacies. Uncovering hidden gems, be it coins, tokens or NFTs, is his expertise. NFTs drive deep interest for him, and his creative analysis of NFTs opens up engaging narratives. He strives to bring decentralized digital assets accessible to the masses.