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The US Government has released a cryptocurrency and Bitcoin tax guide for investors and taxpayers
Cryptocurrencies have gained wide acceptance from different parts of the world because they held a promise of a decentralized economy, independent of government regulation. Now that they are being used widely, including in war zones, cryptocurrencies are attracting huge attention from regulators, paving way for interference from the Governments. The even United States, which boasts of supporting a liberal economy, has come up with regulations to tax crypto income. Recently, it has come up with a Cryptocurrency and bitcoin tax guide, to educate people against scams and fraudulent transactions. IRS, which administers US federal tax, has also established several frameworks and measures to ensure the safety of crypto investors. With Bitcoin going mainstream in the US, the regulators felt it very much necessary to bring it under surveillance. Though IRS doesn’t consider Bitcoin as a legal tender, it considers as a token for exchange holding a certain value. To ensure that US taxpayers are aware of the procedures which involve cryptocurrency taxes, they have released the cryptocurrency and Bitcoin tax guide.
All US citizens now come under the crypto jurisdiction of the IRS. They are expected to file a tax return to the IRS if they were involved in crypto trading in 2021. US taxpayers can file their taxes within the deadline, with penalties issued for submissions made after the deadline. In a way, cryptocurrencies are being treated as properties worth taxation in the United States. Originally, these rules were regulated by IRS, in a notice published in 2014, which also indicated that most of the taxable transactions will be treated on par with financial stocks incurring capital gains tax.
When do Cryptocurrency assets become taxable?
To understand the basics of cryptocurrency tax, investors need to first understand when they really need to file taxes for cryptocurrency investments. Firstly, simply buying virtual currencies with US dollars and keeping them within the exchange where they made the purchase or transferring it to their personal wallet does not mean that they are subjected to taxes. Cryptocurrencies start becoming taxable after they use crypto as a method of exchange. This includes selling the crypto for US dollars, exchanging one cryptocurrency for another, and then buying another cryptocurrency to pay for goods or services.
Similar to cryptos, NFTs are also taxed, but since, the IRS has not yet released any specific tax guidance on NFTs, it can be a little confusing to explore. But if investors are creating or minting NFTs, then it is crucial to know how NFTs are taxed that they will be subjected to long-term or short-term taxes based on the nature of investing and according to the gains tax rate.
How are cryptocurrencies taxed in the US?
In 2014, the IRS issued a notice to clarify that virtual currency is treated as property for tax purposes, cryptocurrency is taxed as a capital asset and the gain or loss of every taxable event must be reported in Form 8949 of the IRS that denotes the cryptocurrency tax form. Then, from 2019, the IRS started asking taxpayers about their virtual currency activity on their tax returns, so that there is no room for taxpayers to claim that they were unaware that cryptocurrency transactions needed to be reported. If the taxpayer fails to report their cryptocurrency taxes, the IRS may impose penalties based on the nature of transactions.
Furthermore, selling or investing in crypto can incur capital gains tax. But the IRS also distinguishes between short-term and long-term gains that are death differently. Just like any other asset investment, losses can be offset against gains. Paying for goods or services using cryptocurrency also generates capital gains if the person making the transaction profited from the difference between the price of the goods or service and the purchase price of the used cryptocurrency.
Can Crypto be the go-to means of financial asset generation?
Inflation is running at a four-decade high in the US, and the IRS has responded by making wide-ranging adjustments that affect crypto investors. In the coming year, crypto tax regulations could become even more pervasive. This could become a reality in the form of tightening reporting rules around Defi, airdrops, hard forks, and reporting rules for privately held wallets. There are several intricate ways through which taxpayers have to file their cryptocurrency transactions. Currently, it is crucial to take help from professionals if needed and understand the repercussions of taking a single wrong step in order to avoid trouble from the IRS.
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