FAQs Regarding the Possession of Cryptocurrency and its Taxation.

Are cryptocurrency profits taxed?

Yes, cryptocurrency profits are taxed in the same way that capital gains are. Remember that even if you don’t receive any cash from your crypto profits, you must pay taxes on them.

Because the IRS treats crypto assets similarly to traditional capital assets (stocks and bonds), they are classified as property and taxed accordingly. To calculate your cryptocurrency gains tax, take the selling price of your asset and subtract the cost price. The resulting amount represents your profit from trading or holding the asset for a period of time. Your crypto tax liability will then be calculated using the previously discussed rates and holding periods.

Is it necessary to report cryptocurrency if you did not sell it?

Buying cryptocurrency is not a taxable transaction. This means that if you only keep your cryptocurrency for personal use, you are not required by law to report and pay taxes on it. Because cryptocurrency does not immediately incur gain or loss, it is not taxed—even if its value is increasing.

So, how about moving your cryptocurrency from one wallet to another?

These types of transfers are also exempt from taxation. They do not require reporting or payment of taxes. However, if you receive cryptocurrency as income, such as a salary or rewards from a blockchain project, it is taxable and this can be done using some best crypto tax software. You must calculate the cryptocurrency’s fair market value at the time you received it and pay taxes on the resulting amount.

Receiving crypto gifts is a tax-free event for both the giver and the receiver if the value of the gift is less than the annual gift tax exclusion limit. The same is true for cryptocurrency inheritance.

Is the IRS aware that you own cryptocurrency?

The short answer is possibly. The IRS has increased its efforts to locate cryptocurrency owners who have failed to pay their taxes. In 2019, the IRS established a crypto compliance task force and sent letters to over 10,000 US taxpayers who may have failed to report their crypto holdings and gains.

However, taxpayers are currently required to declare their crypto activities on Form 1040. These activities include receiving, selling, sending, exchanging, or purchasing a cryptocurrency interest. As a result, failing to declare crypto activities may increase the likelihood of an IRS audit.

What is the difference between DeFi and NFT taxes?

So far, current IRS cryptocurrency tax rulings do not specifically mention decentralized finance (DeFi). However, because they involve cryptocurrencies, DeFi and yield farming transactions may still be considered taxable under the general cryptocurrency tax rules.

The same is true for nonfungible token taxes (NFTs). Although the IRS has not issued any guidance on how to tax NFTs, they are almost certainly taxable as property under current IRS rules. This means that if you sell an NFT, you will have made a profit and must report it as a capital gain.

Is it possible to avoid crypto tax?

There are several ways to avoid paying taxes on your cryptocurrency profits, including donating it to charity or gifting it to friends and family. These methods are entirely legal and can assist you in lowering your tax liability.

Binocs is an excellent platform for managing cryptocurrency taxes and coin tracking. It handles daily market value fluctuations and keeps our coins and tokens in perfect condition.