Сryptocurrency in the US

US laws define virtual currency as a digital representation of value. Cryptocurrency in its turn is one of its types that is digitally recorded on a distributed ledger and secure transactions by means of cryptography.
Cryptocurrency (or crypto) is treated as a property, not as money or currency.

While there is no specific crypto tax in the US, crypto is taxable and is mainly subject to income tax and capital gains tax.

The tax authority is called IRS – Internal Revenue Service.

You should not try to hide your crypto from them. When you open an account with the crypto providers, you send them your identification documents for AML purposes. Most of the crypto providers have data sharing programs with the state authorities including the IRS. Thus it’s reasonable to assume that IRS already knows about your crypto transactions. Tax evasion is a serious crime in the US so always do file tax returns and show all your crypto income.

For the tax purposes, all your crypto owned, sold, traded, acquired shall be valued in USD – you shall use the fair market value of the crypto (the exchange rate of the reputable crypto exchange) as of the date of the event or transaction.

US tax year lasts from January 01 until December 31.

IRS suggests the deadline for filing the tax return and paying the tax: April 15 of the next year.

You shall file federal income tax return on paper or online that would include all your income, gains and losses. The report shall be in USD only thus you will need to get a USD fair market value of all your crypto.

There are two main taxes in crypto: income tax and capital gains tax. The borderline is the type of the transactions: income tax arises when the individual receives crypto as earning, e.g. as a salary, or receives coins for mining activity or airdrops.

Since IRS treats crypto as property rather than currency or money it means that every time you dispose of the crypto, it triggers capital gains tax which is a tax on the profit when the disposed asset has increased in value.

You need to assess whether you got profit or loss and pay respectively.

Let’s start with an easy part – income tax based on the applicable income tax rates. Income tax applies to the crypto received e.g. as a result of mining, airdrop, or from your employer. One important thing to consider is that CGT may arise when you sell the earned crypto with a profit.
You shall use the fair market value of the crypto that you receive from your employer or as a result of the mining or other activity.

Capital gains tax is a bit more complex than the income tax. It arises any time you dispose of the crypto. For the tax purposes, disposal means “getting rid” of your crypto by any of the following means:

• sell crypto for fiat currency;

Example: you buy Coin A for $3000 and later sell it for $4000. You'll need to pay tax on the resulting $1000 gain.

• swap, trade, exchange one coin to another;

Example: You bought 1 Coin A for $2000. You exchange 1 Coin A for 10 Coins B. The market value of 10 Coins B is $3000 at the moment. Since initially you paid $2000 to acquire Coin A, you use the following equation: $3000 - $2000 = $1000, which is your Capital gain for the tax purposes.

• use crypto to buy goods and services;

Example: You buy Coin A for $5000. Later Coin A increases in value and you use it to buy a new device that costs $7000. The $2000 difference is your gain and you shall pay tax on it.

CGT arises when any of the above events happen. However you may get a gain or loss as a result. If you have a gain – you may pay tax on it. If you have a loss – not only you don’t need to pay tax, but rather you can reduce your tax burden.

The gain equals to the difference between the amount you sold the assets for and the amount you paid for them. If the asset was acquired for free, you shall take the fair market value of the asset at the date of acquisition.

The IRS distinguishes between short-term capital gains and long-term ones: they are called holding period and are essential for the tax calculation since you pay much less tax on long-term gains. The holding period starts the next day after you acquire the crypto and finishes the day of the disposal of it. If your holding period is more than a year – you are eligible for more favorable long-term capital tax rates.

As we discussed above, when any of the events triggering CGT happen, you may have either a capital gain or a loss.

If you make a capital gain, you may pay tax on it. If you make a capital loss, it can reduce your capital gains in the current tax year and you can even carry it forward to the next years.

In order to calculate the tax due, you shall start with the beginning: you need to calculate your capital gains/losses.

Basically it’s the difference between the USD equivalent of your crypto at the time you disposed of it and at the time you got it. If the result is more than zero – you have a capital gain for this asset. If it’s less than zero – you have a capital loss and you don’t need to pay the tax and can even reduce your tax due.

Capital gain/loss = your disposal price in USD – your cost basis in USD (the acquisition price + deductible fees)

Example: You acquired 1 Coin X for $1000 and paid a $100 fee. Then you sell your Coin for $2000 and paid a fee of $100. The cost basis is thus $1100. Capital gain equals to $2000 less the cost basis of $1100 + the new fee of $100.

$2000 - $100 – ($1000 + $100) = $800

If you acquired or disposed of your crypto otherwise than buying or selling for USD, you shall use the similar equation and take the data from the reputable exchange on the date of the relevant transaction (fair market value).

It’s easy if you have acquired a number of crypto items at once and have sold the same number in one take. However it’s not always the case. If you sell only part of the items you hold, you may face the following situation:
You bought 1 Coin A for $5000. Later you bought another Coin A for $10 000. Now when you decide to sell one Coin A, Coin’s A value equals to $7000. Which of the coins A shall be accounted for the tax purposes? The first one or the second one? If we take the first one – you have $2000 profit. If we take the second one, you have a loss of $3000. This makes a serious difference. In order to sort it out, you shall have a fair treatment in such situations.

IRS suggests you to choose the accounting method which shall be applicable for your whole tax year. You can not change it in between. They are:

• FIFO method (“first in – first out”). When you dispose of a part of the crypto you own, you account first items acquired.
• LIFO method (“last in – first out”). It’s vice versa: you account last acquired items when disposing of them.
• Direct identification. You name the specific item for disposal by any digital ID’s that could provide for exact identification.

When you have a loss, you can use them to offset your gains, however you shall use the long-term capital losses to offset the long-term capital gains and same is for the short-term capital losses.

If your private keys are lost or you’re defrauded, this will not be considered loss from IRS perspective. There is however an interesting case with the crypto exchange bankruptcy – there is no guidance yet, but there is a chance that the crypto lost due to such events might be eventually treated as a loss.

When comes to the tax rates, there are several things you shall take into consideration: the holding period of your crypto; your marital status; your total taxable income (not only your crypto gains).

Short-term capital gains and your income will be taxed in accordance with the Income tax rates. Long-term capital gains are taxed on separate rates.

Income tax and short-term gains for the year 2022:

Single return

Long-term capital gains are taxed at the separate tax rates which are lower than the short-term ones, and thus it might be beneficial to hold crypto a bit more before disposal. Note you don’t pay tax on long-term gains until you reach the threshold of $41,675 as a single.

The rates applicable for the year 2022 are as follows:

Although most of the transactions imply taxes, some are exempted. This might be the case if you:

There are also some discounts you may be eligible for:

Note however that you are advised to carefully record all the data about your transactions, even if they are tax exempted or discounted.

Mining
IRS treats new crypto received within mining process as your income and they shall be included into the tax return based on their fair market value. If your mining is more of a business, it might trigger self-employment income and self-employment tax.

Staking
Staking is treated similarly as mining.

Defi
There are numerous types of DeFi transactions and they might have different tax consequences. As with other income-like events, when you earn new coins as a result of the DeFI transactions, you need to consider income tax. Whereas if you get capital gains on your invested coins within the DeFi platforms, you may be subject to CGT for making profit.

Airdrops
When you receive new coins as a result of the airdrop, you are subject to income tax.

NFTs
Since NFT’s are also considered crypto, general tax rules shall be applicable to them. If you create an NFT being an artist and you get earnings from selling it, then you are subject to income tax. If you have got NFT as an investor and later dispose of it – you are subject to CGT.

You shall also note that when you later sell any of your mined or airdropped coins, or the ones you have received from DeFI, you may be subject to capital gains tax if you got a profit. Don’t worry about double taxation – this is not actually the case here. Imagine you mine a coin worth $ 1000. You need to pay income tax on this value. If you later sell it for $ 1500, you pay CGT on the difference between the initial cost and the cost of selling: $1500 - $1000 = $500 which is your gain and you will need to pay tax on it. However if you sell it for e.g. $500 only, your transaction results in a loss and you may reduce your other gains for this amount.

Gift.
When you receive a bona fide gift, it's not considered an income. Until you dispose of it and get capital gains. The holding period rule is applicable for the gifts as well and the period would include the time the crypto had been held by the gift donator.

Transfer fees when moving crypto between your own wallets
Transaction fees that you may pay to the cryptocurrency service provider are an interesting issue from tax perspective. IRS would consider the fee you pay to the provider in crypto as a disposal and thus subject to CGT. You will need to pay tax if the resulted amount is a profit.

IRS requires from the tax payer to maintain records that would be sufficient to show the income you received or the loss you got. The documents might include receipts from the exchanges, fair market value confirmation, wallet addresses and similar information.

Liability

Tax evasion is a very serious crime in the US and might end up in imprisonment or significant fines.