Key Takeaways:
- Cryptocurrencies are taxed as property, meaning most crypto transactions, including selling, exchanging, and spending, are taxable events.
- Starting in 2025, Form 1099-DA will be used to report capital gains and losses from crypto transactions.
- Accurate record-keeping and reporting are crucial for compliance and minimizing tax liability.
Taxable Events:
- Selling, Exchanging, or Spending Crypto: These actions trigger a taxable event. If you exchange crypto for other crypto or for fiat currency, you must report any resulting gain or loss.
- Mining and Staking: The fair market value of mined or staked crypto when received is taxable as income. If you sell the mined or staked crypto later, you’ll also have to pay capital gains tax on any appreciation.
Taxation of Crypto:
- Capital Gains:
- Short-term gains (crypto held for less than 1 year) are taxed at ordinary income rates.
- Long-term gains (crypto held for more than 1 year) benefit from lower, more favorable tax rates.
- If you make a loss, you may be able to use it to offset other taxable income (known as tax-loss harvesting).
Reporting Crypto Transactions:
- Form 1099-DA: Starting in 2025, exchanges and other platforms will report your transactions through this form, which will include the gains and losses from your crypto activities.
- Form 8949 and Schedule D: You’ll need to report your total crypto gains or losses using these forms, detailing each transaction’s date, cost basis, and sale price.
Specific Crypto Activities:
- Mining/Staking: When you mine or stake crypto, the fair market value on the day you receive it is considered taxable income. If you later sell or exchange it, the gain or loss is treated as capital gains.
- Airdrops/Hard Forks: If you receive crypto from airdrops or hard forks, the IRS treats it as ordinary income, and it’s taxable at the fair market value when received.
- DeFi Lending and Borrowing: Interest earned through DeFi activities is treated as ordinary income. If you lend crypto and earn yield, that income is taxable when received. If you participate in a liquidity pool, the income is taxed similarly.
Crypto Donations:
Donating appreciated cryptocurrency to charity can help you avoid paying capital gains tax. The donation is also deductible at the fair market value on the day of the donation, which can potentially reduce your tax burden.
Record-Keeping:
Keeping track of all crypto transactions is crucial. Ensure that you record:
- The date of the transaction
- The amount and type of crypto involved
- The cost basis (what you paid for the crypto)
- The sale price or fair market value when sold or spent
Pitfalls to Avoid:
- Failing to Report Transactions: Not reporting crypto activities can lead to penalties and fines. The IRS has become increasingly vigilant about crypto reporting, and it can be difficult to avoid detection.
- Overlooking Small Transactions: Even small transactions, like using crypto for purchases, can trigger taxable events. It’s important to track every exchange of crypto.
https://countonsheep.com/blog/how-to-file-crypto-taxes-your-essential-2025-guide
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