A crypto currency is an encrypted data string that denotes a unit of currency. It is monitored and organized by a peer-to-peer network called a block chain, which also serves as a secure ledger of transactions, e.g., buying, selling, and transferring.
Individuals and crypto currency:
However, in the US, crypto currencies are treated as capital assets. So, when a person transfers crypto currency at a profit, he/she is liable to pay tax depending on whether the assets are long-term crypto assets or short-term crypto assets. The US law states that assets sold after one year of purchase are classified as long-term capital assets. Long term assets are subject to lower tax rates. But if the assets are sold within a year of purchase, they are classified as short-term capital assets. Further, the US income tax law allows claiming the losses from crypto assets and setting off against other income sources. Moreover, if any loss is unadjusted, it can be carried forward to set off against future investment gains.
The US tax law does not require withholding tax at the time of payment of consideration for the crypto asset, and also receiving crypto currency as a gift is a non-taxable event to the recipient (donee). The recipient doesn’t have to pay tax or report it in their returns. However, at the time of sale of such a gift in future, the recipient will have to pay capital gains taxes. But the person who sends a gift needs to report the same if the value of the crypto assets gifted exceeds a certain specified limit.
Crypto Assets Received as Payments in the Business Transactions:
As per US law, if any goods or services are purchased using crypto assets, such transactions shall be regarded as exchanging crypto assets for goods or services. The taxpayer is required to pay capital gains tax if the value of such assets exceeds the price which was initially paid for it.
Also, if the crypto asset is received as a payment for a business transaction, the fair market value on the date and time of receiving such crypto assets shall be treated as income and taxable at regular tax rates.
Tax Implications for Defi or Other Use Cases of Crypto
According to the US taxation rules, if you earn crypto assets by mining them or receive them as a promotion or payment for goods or services, it shall count as your regular taxable income. Tax is required to be paid on the entire fair market value of the crypto on the day it is received, at your regular income tax rate.
The IRS considers crypto currency holdings to be “property” for tax purposes, which means your virtual currency is taxed in the same way as any other assets you own, like stocks or gold.
Transactions in convertible virtual currency can generate gain or loss for US tax purposes.
Examples of transactions in convertible virtual currency that can generate income, gain, or loss include:
- Receipt of convertible virtual currency as payment for goods or services. In computing gross income from the payment, the recipient must include the fair market value of the virtual currency, measured in US dollars, on the date of payment. This can include, for example, virtual currency paid by an employer to an employee as wages (with wages subject to income tax withholding and payroll taxes).
- Using the convertible virtual currency to buy other property. For example, using Bit coin to buy a sandwich could trigger taxable gain or loss.
- Exchanging one convertible virtual currency for another virtual currency. The current position is that Section 1031 only applies to exchanges of real property.
- Selling the virtual currency for US dollars (or another real currency).
Because convertible currency is treated as property, general tax rules that apply to transactions in stocks, bonds, and other investment property generally apply. The character of any gain or loss on the exchange of convertible virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer, which will generally be the case for a taxpayer that invests in or trades virtual currency. Gain or loss from a convertible virtual currency transaction may be ordinary income or loss if the taxpayer is considered to be a dealer in the virtual currency.