What precisely is cryptocurrency?
Cryptocurrency is a secure digital currency that uses cryptography. Include bitcoin (BTC) and ether as examples (ETH). Cryptocurrency (or crypto) is decentralized. A government or financial organization does not govern it, but they can put cryptocurrency tax on them.
Crypto tokens are built on blockchain technology. A decentralized digital ledger records transactions over a network of computers, rewarding those who secure the network with economic value. There are various use cases for blockchains and crypto tokens, but cryptocurrency represents the future of banking in the digital world.
Crypto tax basics
IRS guidelines on virtual currency
According to IRS Notice 2014-21, the IRS regarded all digital assets as tangible personal property. Since cryptocurrencies such as bitcoin are digital assets, they are also treated as property. Consequently, all general property tax requirements apply to cryptocurrencies as well.
Think of cryptocurrency as equivalent to a unit of stock. The amount you pay to obtain it provides the cost basis. When you sell something, you generate sales revenue. The difference between these two is a gain or loss. This idea on stock is also applicable in the cryptocurrency industry.
In addition to Notice 2014-21, the IRS produced Rev. Rul. 2019-24 and 46 frequently asked questions about virtual currencies in 2019. (To know more on this, please visit the website of IRS.)
The income ruling covers how to handle hard forks and subsequent airdrops (distribution of a cryptocurrency to various receivers).
When are cryptocurrencies taxable?
Common taxable cryptocurrency transactions for tax purposes include:
- Selling bitcoin and/or NFT for cash (cashing out) (cashing out)
- Exchanging one cryptocurrency or NFT for another (or NFT)
- Spending bitcoins for purchases of goods and services
- Earning digital currency via staking, mining, rewards, or salaries.
Receiving a new cryptocurrency as a result of a hard fork or an airdrop