US people believe that there is no government regulation for crypto trading. So, most of them think that earning or holding cryptos is not taxable. In the US, crypto exchanges must report user activities on losses and gains between users. They have a tax system similar to all other tradeable stocks or assets.
Is your crypto liable for taxes?
Ok, do you pay taxes on crypto? You may have to pay the same taxes on cryptocurrency that you would for any other type of capital assets, such as when realizing a gain or loss. For example, if you buy stock and it appreciates over time before selling it at a higher price than your buying price (a capital gain), your net proceeds will exceed your cost basis. When this happens with Bitcoin or another investment class like stocks or bonds, the IRS wants their share - meaning they might consider cryptocurrency taxable property.
What are the rates?
When you make gains on crypto, they are usually taxed at a rate that ranges from 10% to 37%. The more your earnings, the higher your tax rates will be. However, if you hold onto crypto for a year or longer and then sell it later, there is usually a much lower long-term capital gains tax that applies at rates of either 0%, 15%, or 20%, depending on how high-income earners are in comparison to others.
Penalties
Last November, Congress passed new legislation that requires cryptocurrency exchanges and brokers to directly notify the IRS of crypto transactions after finding a loophole that enabled some investors to hide their gains. But the failure of payment occurs due to taxpayers misunderstanding the entire taxing process. Taxpayers have until April 18th to file taxes, or they will be subject to penalties, interest charges, and even jail time.
How to reduce taxes?
There are two ways to avoid or reduce cryptocurrency taxation. The first is the simplest: if all you want to do is hold your coins until death, there's nothing for tax authorities to collect from you. However, most investors plan on making a profit off of their positions at some point. One can minimize crypto taxation by using losses incurred from other investments and offset any gains made with them. For example, if a person owns Bitcoin worth $5K but has a loss in stock valued at $5K, they could sell their stock and use that loss against the taxable Bitcoin gain without increasing their taxes drastically after selling it (if anything). Another way to reduce crypto taxation would be holding positions longer than one year. They benefit from lower long-term capital gains tax rates than short-term ones charged when profits are realized within 12 months of purchase date.
Are taxes applicable for forks and airdrops?
Taxation has been ambiguous with airdrops and forks. In the past, the IRS released a new cryptocurrency tax guidance that was supposed to answer some questions like do you pay taxes on crypto but left many more unanswered. The new direction said that any newly created cryptocurrency from a hard fork in an existing blockchain or an airdrop should be treated as ordinary income equal to the fair market value. This applies when received by anyone who received it. Regardless of whether they want it, you are liable for their taxes if you accept these things.
Summary
Cryptocurrencies have become popular, but cryptocurrency tax is complex and unclear. You as a holder of cryptos often thinks that do you pay taxes on crypto? The IRS has given some new guidance on calculating capital gains; however, traders and investors should be sure to use a software program that automatically calculates tax rates for themselves. They can use FlyFin tax calculator for this purpose.
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