Cryptocurrencies have gained massive popularity over the last couple of years. And while they may not be considered mainstream just yet, a substantial number of people send and receive payments as cryptocurrency. It is for this very reason that the Internal Revenue Service (IRS) finally had to clarify its treatment of virtual currencies. Before anything, it is important to note that cryptocurrencies are completely taxable, and as such, you have to report such transactions on your tax returns. But how exactly does the IRS tax such transactions?
The IRS formally launched crypto taxes in 2014, during which they recognized virtual currencies as capital assets (just like property, bonds, or stocks). Based on tax laws, capital assets are taxed whenever they are sold at a profit. This means if you were to use cryptocurrency to purchase goods or services and you wind up making a profit, you are going to incur capital gains taxes. Some examples of crypto actions that are taxable include using cryptocurrency to purchase goods and services, selling cryptocurrency for fiat, and trading or swapping one crypto asset for another. Transactions such as interest earned from decentralized finance, crypto earned from staking and liquidity pools, crypto mining income from transaction fees and block rewards, crypto received from airdrops, and cryptocurrency received for work done are usually taxed as regular income tax.
That said, you will be expected to keep a record of all buying, selling, investing, or usage transaction related to cryptocurrencies. Failure to do so may put you at risk of tax liabilities resulting in penalties, interest, or even criminal prosecution.
