US citizens who profited from cryptocurrencies during the 2021 tax year will need to report this to the IRS and pay any tax due. Failure to do so may result in a hefty financial penalty, so it’s important to report your activities accurately.
If you’re not sure what to report or how, then this guide is for you. Let’s delve into the IRS’ guidance on cryptocurrency and how to get your tax return right this year. Do I Need to Pay Tax on Crypto in the USA
Whether you need to pay any tax and how much will depend on your income and the nature of your activities. The USA has separate taxes for income and capital gains. Let’s take a look at which activities are taxable and which tax applies. Investing and Trading
Although there is no tax on buying cryptocurrencies, you will need to pay Capital Gains Tax whenever you “dispose” of them. A disposal could mean selling your crypto for fiat, swapping it for another cryptocurrency, or using it to pay for goods and services. The tax doesn’t apply to the entire amount you receive from a disposal, just the profit you make from it. Mining
If you receive crypto from mining, it will be subject to Income Tax. You will also need to pay Capital Gains Tax if you later dispose of the crypto you mined. If you’re a self-employed operator of a mining business, you will need to pay Self Employment Tax as well. Staking
The IRS doesn’t have any specific guidance on staking. It has long been assumed that staking rewards would be taxed similarly to mining rewards. However, this could change as a court case claiming that staking rewards should be viewed as the creation of new property could mean that only Capital Gains Tax will apply in future. DeFi
Although the IRS hasn’t issued guidance on specific DeFi activities, you will still need to pay Income Tax when you earn crypto and Capital Gains Tax when you dispose of it. This means that interest and rewards earned through DeFi staking, yield faroming, or play-to-earn protocols will be subject to Income Tax.
Meanwhile, if you profit from DeFi margin trading and options protocols, or dispose of your crypto DeFi rewards, this will trigger Capital Gains Tax.
If you profit from providing liquidity to DeFi protocols, this will result in Income Tax if you earn new coins or Capital Gains Tax if you increase the value of one asset. When adding or removing liquidity to or from DeFi pools, this may result in Capital Gains Tax if you receive new tokens or exchange tokens in the process. Airdrops and Forks
If you receive coins from an airdrop or a fork, they will be considered income and so you will need to pay Income Tax on them based on the fair market value of the coins on the day you receive them. If you later dispose of coins received from an airdrop or fork, this will also trigger Capital Gains Tax. NFTs
If you purchase an NFT with fiat currency, there will be no tax, while if you buy an NFT with crypto, this counts as a disposal of your crypto and will trigger Capital Gains Tax. You will also need to pay Capital Gains Tax when you sell an NFT you have bought.
You won’t need to pay any tax to create your own NFT. If you sell it, this will trigger Income Tax, but you may be able to add any minting costs to your cost basis. Earning in Crypto
If your employer pays you crypto as remuneration for services, this will be subject to Income Tax, while if you receive crypto for performing services as an independent contractor, you will need to pay Self Employment Tax. Use the fair market value of the crypto in US dollars on the date you received it to calculate the amount of tax owed. Allowable Expenses
The following expenses count towards your cost basis and so can be deducted from any profits before tax is applied Transaction fees
Brokerage commissions
Exchange fees
NFT minting costs
How Much Tax do I Need to Pay?
How much tax you’ll need to pay will depend on your income. Let’s take a look at the tax rates in detail below. Capital Gains Tax The tax rates for capital gains are different depending on how long you held your crypto before disposing of it.The short-term Capital Gains Tax rates for […]
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