Taxes

Taxation of Cyrptocurencies in the U.S.

Cryptocurrencies like Bitcoin and Etherum are considered property under federal tax purposes. Under current law, cryptocurrency is not treated as currency that can make you profit or incur a loss for U.S. federal tax purposes. The general tax principles which apply to property transactions are also applied in the case of crypto transactions. Property is counted under the capital asset and therefore, it is subject to capital gain tax.

Cyrptocurrency capital gain tax-sale or exchange

Capital assets include all kinds of property whether it is being used for personal, business or investment purposes unless the property is specifically excluded from the definition. Therefore, income earned on sale or exchange of cryptocurrency is taxable.

If cryptocurrency is sold, the capital gain or loss is calculated as the difference between the sale price and adjusted basis cost of the cryptocurrency.

If cryptocurrency is exchanged, the capital gain or loss is calculated as the difference between the cryptocurrency fair market value on the date of the exchange and the adjusted basis of the cryptocurrency.

The net gain or loss made on sale or exchange of cryptocurrency is either taxed as a short-term capital at ordinary income tax rates or long-term capital assets at reduced rates. Whether the capital asset is short-term or long-term, it depends on the holding period.


Income tax for Cryptocurrency

Gross income includes all income earned during a specific period. In the case of cryptocurrency, income generated from all the transactions related to crypto will be shown as taxable income in the return and taxed at ordinary income tax rates.

Taxes on Airdrops

The tax advisors from States believes in taking a conservative approach while considering income from Airdrops. Earning from Airdrop is taxed as normal income on the date of receipt and the holding period starts from the very day. Fair Market Value as on the date of receipt is considered while recognizing the normal income of the cryptocurrency.

Taxes for Hard Forks

As per IRS's cryptocurrency tax guidance dated October 9, 2019 ordinary income from Hard Forks is equal to the fair market value of cryptocurrency. This is subject to the matter that you have dominion and authority of transacting the cryptocurrency.

Taxes on Mining income

Mining income generated by the taxpayer over and above $400 needs to be reported to the IRS. The taxpayer must identify his or her status for tax reporting purposes i.e. if it is a hobby or business.

Hobby Miners
If hobby miners do not generate more than $400 then income received will be treated as ordinary income. Any losses incurred in this event cannot be adjusted against the taxpayer's ordinary income. 

Business Miners
If the taxpayer is a business miner who generates trade income or owns/leases his or her own mining equipment and generates over $400 as business mining income, then the income will be reported as self-employment income. Expenses incurred while earning such income including but not limited to the depreciation of mining income, hardware, electricity, will be considered for tax purposes.

Taxes on lending

As per IRS guidelines, cryptocurrency is not a medium of exchange like money but it is rather treated as property. And the property is not mutually interchangeable, especially with fluctuating value.

In order to be consistent with the cryptocurrency treatment in the capacity of the property, the borrower should ensure that repayment to the taxpayer (lender) is done for the same amount in value and denomination. Any difference will be recognized as capital gain or loss.

Initial Coin Offering (ICO)

During ICO, cryptocurrency companies receive crowdfunding from investors in exchange for security and utility token.

Taxes on margin trading

Financial derivatives like future & forwards which cannot be traded on exchanges or board of trade which are not located in the USA and don't meet section 1256 contracts, such transaction will attract capital gain as per Capital Gain section.

As Margin Trading of cryptocurrencies does not generally meet Section 1256 contract requirements, therefore, they are subject to Capital Gain Sections regime.

FBAR and FATCA reporting

US taxpayers need to file two reports i.e. FBAR (Foreign Bank and Financial Accounts) and FATCA (Foreign Account Tax Compliance Act) provided their foreign assets/accounts exceeds set thresholds. There is no clear cut description on crypto holdings that qualify as foreign assets, however, after taking penalties for FATCA and FBAR reporting violations, it is recommended to report all crypto holdings as foreign assets.

FBAR reporting

A United States person must file an information report on an annual basis on FBAR or FinCen 114. The detailed report should include the account name, number, name & address of the foreign bank, type of account, and maximum value during the year. This report is different from Income Tax reporting and it is filed online.

FATCA reporting

A United States person whether living abroad or in the country if holds specified foreign financial assets and files Income Tax return then he or she must also file Form 8939, FATCA. The FATCA reporting depends on two factors whether the taxpayer is going to file a joint income tax return and live abroad. 

Tax reporting forms

Click here to locate the federal tax reporting form and input the number you want to know more about. 

State Taxes

Many states have not issued guidance on cryptocurrency income tax treatment. In the absence of guidelines, taxpayers should consider how that state levy tax on other currencies and to what extent state tax treatment follows federal rules. 

Charitable contributions and gifts of crypto and tax implications

Recipient of a gift:

If you receive crypto as a gift that crypto is not taxable until you sell it.On selling it, your cost basis will be equal to the cost as the person who gifted it to you.

Person who gives the gift:

you are exempt from paying tax if you have given a gift of crypto of up to $15,000 per recipient per year. If the amount of gift exceeds $15,000 per recipient, you are required to file a gift tax return.

Charitable donations:

If crypto is given directly to a 501 (C)(3) charitable organization:

  • You can claim a charitable deduction equal to the fair market value of the donated crypto.
  • You may see a larger tax deduction on receiving full value of your charitable contribution rather than paying taxes on gain made by selling the cryptocurrency and in turn donate the money.

Vizi Wallet Customers

Vizi Wallet customers can generate reports of all buys, sells, sends, and receives of all types of cryptocurrency associated with their Vizi Wallet accounts. These reports through a light on your cost for all purchases and proceeds for all sales, inclusive other fees.

Note: these reports have detailed transactions associated only with your Vizi Wallet account, and it will not have information regarding those wallets or exchanges in which you moved crypto prior to moving onto the Vizi Wallet platform. If you have used other exchanges, you need to download reports separately for them.

To calculate gain and loss, you need the cost basis of each transaction i.e. the amount spent in dollars while buying and the amount earned in dollars at the time of sale.

Applying a method to get a certain tax treatment for crypto transactions

If you have purchased crypto at different times then there are a few options to determine their cost. Cost of the first crypto purchased, the last ones purchased, or specific identification method can be used. Vizi Wallet considers the individual cryptocurrency transactions, but you will have to determine which of the methods will be followed- FIFO(First-in-First Out), LIFO(Last-in-Last-Out), or the Specific Identification method.

Consult a tax professional

It isn’t easy to calculate or pay bitcoin taxes or other crypto taxes, therefore, it is wise to seek professional help.
Vizi Wallet doesn’t provide tax consultation but it wants each of its members to not face any confusion.

Prepare your forms

Here are some of the forms you might want to get familiar with. A few of them are provided by Vizi Wallet and others you can put together yourself.

Forms you may need include:-

Form 8949: If there is any transaction that qualifies for capital gain or loss then it needs to be mentioned here and you can refer to transactions report for the same.
Form 1040: Famously known as just Schedule D, this includes summary of capital gains and losses.
Form 1099-K: If gross proceeds exceed $20,000 and more than 200 transactions are there in a calendar year on any exchange, this form needs to be filled showing all of the transactions reflecting in your accounts in a calendar year.

Note: This doesn’t record your cost basis — it’s just an aggregation of all the proceeds you received from your disposition transactions. However, transactions have to be reported individually to the IRS.

File your taxes

You have details of all the transactions including gains and losses, you’ve consulted a tax- planning professional, and the forms are ready. Well done as now you are ready to file your taxes.

Cryptocurrency Tax FAQ

Cryptocurrencies like Bitcoin and Etherum are considered property under federal tax purposes. Under current law, cryptocurrency is not treated as currency that can make you profit or incur a loss for U.S. federal tax purposes.

The general tax principles which apply to property transactions are also applied in the case of crypto transactions. Property is counted under the capital asset and therefore, it is subject to capital gain tax.

The sale or exchange of cryptocurrency is subject to capital gain tax. Let’s say if you exchange Bitcoin for some other cryptocurrency, it will result in a capital gain or tax.

The net gain or loss made on sale or exchange of cryptocurrency is either taxed as a short-term capital at ordinary income tax rates or long-term capital assets at reduced rates. Whether the capital asset is short-term or long-term, it depends on the holding period. Therefore, if cryptocurrency has been held for more than a year, tax on long-term capital gain is paid.

Short-term and long-term capital gains need to be calculated and details have to be given in Form 1040 and Form 8949. Capital gains are automatically calculated using Vizi Wallet and forms are automatically filled.

Mining income generated by the taxpayer over and above $400 needs to be reported to the IRS. The taxpayer must identify his or her status for tax reporting purposes i.e. if it is a hobby or business.

If the taxpayer is a hobby miner then income received will be treated as ordinary income.

If the taxpayer is a business miner who generates trade income or owns/leases his or her own mining equipment and generates over $400 as business mining income, then the income will be reported as self-employment income. Expenses incurred while earning such income will also be considered for tax purposes. 

IRS states that a hobby aims for recreation and pleasure. The IRS considers the following criteria to find out if the activity is a hobby or trade or business. Not one but all the below-mentioned factors must be considered.

  • You carry the cryptocurrency activities in a business-like way and maintain complete books of accounts.
  • The time and effort you put in mining activities are with the intention of making a profit.
  • You depend on this income for your livelihood.
  • Controlling losses is not in your hands.
  • You change your methods in order to improve profitability.
  • You and your advisor have the requisite knowledge to carry business.
  • You were successful in making a profit by engaging in similar activities in the past as well.
  • How much profit does the activity made and in how many years?
  • Do you expect to make a future profit from the appreciation of assets that have been used in the activity?

Hobby miners need to report their income on Form 1040. Self-employed mining income along with expenses needs to be reported on Schedule C and Form 1040. Also, the self-employed tax paid needs to be reported on Schedule SE and Form 1040.

Vizi Wallet aims to provide you with the best crypto tax reporting solutions. Vizi Wallet team works with Big4 accounting firm ensuring complete legal compliance w.r.t tax reports. Vizi Wallet supports all types of crypto transactions such as Airdrops, Hard Forks, ICOs, Staking, Bounties, Swaps, etc.

There is no tax impact initially i.e. at the time of fork. However, later when you sell or exchange the coin capital gain needs to be realized.

Vizi Wallet application is more than a mere calculator. 

The non-taxable events include:-

  • Donating crypto to a qualified tax-exempt charity or non-profit
  • Buying crypto with cash and holding it
  • Transferring crypto between wallets
  • Transferring crypto between Coinbase accounts, or from an external wallet to a Coinbase account.

If so, then you need one view of all your crypto-related transactions and each of which will be reported on your tax return.

In case you live outside the USA, you will need to check if all the forms have been received to file the tax return. For this you will need all your transaction history reports showing purchases and sales across all the exchanges.