What is cryptocurrency taxation?

It is no longer news that the crypto space has witnessed several regulatory policies, including taxation. The United States Internal Revenue Service has described cryptocurrency as a convertible virtual currency. Furthermore, cryptocurrency is treated as a property, and as such, it accrues capital gain tax.
With the latest d evelopments in the cryptocurrency space, it is easy to wonder whether your crypto transactions or other crypto activities are subject to tax. The answer is not entirely straightforward; hence, we must consider factors that determine tax applicability.

Factors that determine the applicability of crypto taxes

To know if you have to pay tax on your crypto asset or not, you must consider these factors:

The gain accrued on your crypto: When you make a profit trading or staking cryptocurrency, you incur a Capital Gain Tax on the profit you made. To apply Capital Gain Tax, cryptocurrency is treated as a property. It is vital to note that applicable tax is not calculated based on the entire value of your asset; instead, it is calculated based on the exact profit you made. For instance, if you hold $1000 BTC in your wallet and you later sell it for $1300, you are expected to report the $300 profit for the purpose of taxation.
How long you hold crypto assets: Capital Gain Tax can be classified into two categories: Short-Term Capital Gain Tax and Long-Term Capital Gain Tax. Short-term capital gain tax (which is between 0% and 37%) is applicable to the profit made on the crypto asset if you sell within 1 year of holding the asset, while Long-term capital gain tax (which are between 0% to 20%) apply to profit made from selling crypto you held for over 1 year. For instance, if you have $1000 BTC in your wallet and you decide to sell within 1 year of owning it, any profit you make on it will be subjected to capital gain tax calculated at 0% - 37%. However, if you decide to hold that asset for more than 1 year, then applicable tax will be calculated at 0% - 20%.

Types of cryptocurrency taxes and when they apply to your crypto asset

Capital Gain Tax: As mentioned earlier, cryptocurrency is treated as a property for the purpose of capital gain tax. Hence, any profit made on crypto assets is subject to a capital gain tax.
Income Tax: When you mine or receive cryptocurrency through airdrop or accept it as payment on your website or in your store for goods or services, cryptocurrency is treated as income, and as such, Income Tax applies. To determine the taxable amount, the fair market value of the cryptocurrency at the time of receipt is considered.
Self-Employment Tax: If you earn cryptocurrency through self-employment activities, for instance, if you earn crypto through freelancing, you may owe self-employment tax on it.
Gift Tax: If you give cryptocurrency as a gift and it exceeds the annual exclusion limit ($17,000 per recipient for 2024), you may need to file a gift tax return.
Estate Tax: If you pass away and have cryptocurrency in your wallet. The asset is included in your estate for taxation. The value of the asset at the time of death is assessed to know what is applicable.

When tax does not apply

Not all cryptocurrency-related activities or transactions attract tax. Thus, there are times when you don’t have to worry about paying taxes, and these are:

Buying crypto (virtual currency) with fiat: According to the IRS, buying cryptocurrency with fiat is not subject to tax.
Transferring crypto from one wallet to another: If you transfer crypto from one of your wallets to another, you are not liable to pay tax.
A gift: As mentioned earlier, a gift of cryptocurrency that is within the Annual Gifting Exclusion per recipient is not subject to taxation.

Frequently Asked Questions (FAQ)

Can I fill out my tax form by myself?
The simple answer is yes, you can fill your tax form and file tax return yourself; however, it is recommended to seek professional help if you perform hundreds to thousands of crypto transactions or find calculating the amount payable as tax difficult.
Will everyone be required to pay tax on their crypto transactions?
Not everyone is mandated to pay tax on their crypto assets or transactions. However, to determine if you qualify for exemption, you have to check if you are within the filing threshold or not. Other factors like age and marital status also affect the threshold. Check here for status clarification here
When can I pay a lower tax on my cryptocurrency?
It is possible to pay below the expected tax amount if you record a loss on your cryptocurrency transactions. For instance, if you have two crypto assets, let’s say $1000 BTC and $600 BNB. If you sell the $BNB for $500, recording a $100 loss, and you sell the BTC for $1300, recording a $300 profit. The taxable profit on your BTC transaction will be $200 because the $100 loss you incurred on BNB would be removed from the profit you made on BTC.
What record should I keep for the purpose of crypto tax?
To report your activities for taxation, you are required to keep a detailed record of all your cryptocurrency transactions. This should ordinarily include details like date, amount, value and market prices.