Cryptocurrency is a digital asset that uses cryptography for secure financial transactions. In recent years, the popularity and value of cryptocurrency have increased significantly, leading to questions about how these earnings should be taxed. Here’s a brief overview of how earnings on cryptocurrency are taxed in the United States.
In general, cryptocurrency is treated as property for tax purposes, rather than as currency. This means that any profits or losses from the sale or exchange of cryptocurrency are subject to capital gains tax. If you hold the cryptocurrency for more than one year before selling or exchanging it, the profits are considered long-term capital gains and are taxed at a lower rate than short-term capital gains, which are profits from the sale of cryptocurrency held for one year or less.
In addition to capital gains tax, earnings from cryptocurrency may also be subject to self-employment tax if the earnings are derived from a trade or business. For example, if you are a self-employed individual who earns cryptocurrency as payment for services you provide, the earnings would be subject to self-employment tax.
It is important to accurately report and pay taxes on cryptocurrency earnings, as the IRS has taken steps to enforce tax compliance in this area. In 2019, the IRS issued a notice reminding taxpayers that they are required to report their cryptocurrency transactions on their tax returns and that failure to do so could result in penalties.
If you have earnings from cryptocurrency, it is a good idea to keep thorough records of your transactions, including the date of the transaction, the type and amount of cryptocurrency involved, and the value of the cryptocurrency in U.S. dollars at the time of the transaction. You may also want to consult with a tax professional to ensure that you are properly reporting and paying taxes on your cryptocurrency earnings.
In conclusion, earnings from cryptocurrency are generally subject to capital gains tax and may also be subject to self-employment tax, depending on the circumstances. It is important to accurately report and pay taxes on cryptocurrency earnings to avoid penalties and ensure compliance with tax laws.