Virtual currency holdings are considered “property” by the Internal Revenue Service (IRS) for tax considerations, which means they are subject to capital gains tax laws. This was laid down by the IRS in a Notice 2014-21 that was released in the year 2014.
The document sheds light on how tax principles are applicable to digital asset transactions.
#1. Filing Taxes for Occasional Trading
Crypto retained for less than a year is subject to short-term crypto tax rates, whereas crypto held for more than a year is subject to long-term capital gains rates. In comparison, the latter is more advantageous than the first.
However, one good thing is that you are an individual filer, you can offset up to $3,000 from your taxable income if your losses exceed your earnings. If you have losses that are exceeding the maximum permissible limit, you can take them forward and deduct them in the coming years.
If you’re a hobby miner, your earnings will be categorized under “Other Income” on Form 1040 Schedule 1.
The interest that you earn from crypto lending operations or liquidity pools is considered taxable income. This income must be declared on your taxes, much as mining and staking rewards.
#2. Day Trading
The technique of crypto day trading entails initiating and leaving a position in the market on the same day. The earnings made by cryptocurrency traders must be taxed. If a trader loses money, they can write off the loss as a capital loss.
You’ll have to estimate your tax obligation four times a year and then make a payment for those amounts. If you don’t, you could have to pay a penalty when you file your taxes.
What About Deductions?
The entire acquisition cost of mining equipment can be deducted under Section 179 in the year it is acquired.
Miners can also claim expenditures like hosting fees, office costs, equipment costs, power costs, equipment maintenance, pool fees, and so on.
#3. Don’t Have a 1099 Form?
A 1099 form is used to record various types of income made by a taxpayer during the year. 1099 is crucial since it is used to report a taxpayer’s non-employment income.
Almost all 1099s and W-2 forms are matched with your Form 1040 or other tax records by the Internal Revenue Service (IRS). When they don’t match, it sends taxpayers a CP2000 notification informing them that they owe additional money.
However, to avoid this from happening, taxpayers are required by the Internal Revenue Code to keep adequate documents in order to prove the positions held on tax returns. As a result, you should keep track of digital money inflows, purchases, trades, and other dispositions, as well as the virtual currency’s fair market value.
#4. Taxable & Non-Taxable Events
The majority of cryptocurrency transactions are taxed, although not all of them are.
Crypto transactions that are taxable include:
- Exchanging cryptocurrency for fiat currency such as the Canadian dollar, US dollar, Euro, and so on
- Hard fork or crypto mining
- Purchasing products and services
- Changing one cryptocurrency for another, such as Ethereum for Bitcoin or Cardano for Ethereum
Crypto transactions that aren’t taxed include:
- Buying cryptocurrency with fiat money
- Giving cryptocurrency as a gift (non-taxable below a limit, subject to gift tax above that)
- Transferring cryptocurrency from one of your wallets to another one
- Donate crypto to a 501(c)(3) non-profit organization
The Bottom Line: Tax Penalties
Failing to abide by tax guidelines for long-term, short-term crypto tax, crypto income taxes, and others will result in penalties and be punishable as tax evasion.
- Failing to report accurate information returns is punishable under IRC 6721
- Failure to give proper payee statements is punishable under IRC 6722
- Failure to abide by additional information reporting standards is punishable under IRC 6723
For returns and statements that must be submitted, the relevant penalty amounts apply as follows:
| Penalty Amount | Condition | Date |
| $50 per failure | Not more than $500,000 (maximum) a year | Within 30 days of due date |
| $100 per failure | Not more than $1,500,000 (maximum) a year | After 30 days, but on or before 1st of August |
| $250 per failure | Not more than $3,000,000 a year | After 1st of August |
| $50 per failure | Maximum of $100,000 | Any calendar year |
FAQs
- Do you pay taxes on short-term crypto?
The income, or gains, made if you sold your cryptocurrency after less than a year would be liable to the short-term crypto tax. This rate is simple: your short-term crypto tax rate is the same as your regular income tax rate, which ranges from 10% to 37 percent.
- What happens if you don’t get 1099 for crypto?
Almost all 1099s and W-2 forms are matched with your Form 1040 or other tax records by the Internal Revenue Service (IRS). When they don’t match, it sends taxpayers a CP2000 notification informing them that they owe additional money.
However, to avoid this from happening, taxpayers are required by the Internal Revenue Code to keep adequate documents in order to prove the positions held on tax returns.
- What are the penalties for not paying crypto taxes?
Failing to abide by tax guidelines for long-term, short-term crypto tax, crypto income taxes, and others will result in penalties and be punishable as tax evasion.
- Failing to report accurate information returns is punishable under IRC 6721
- Failure to give proper payee statements is punishable under IRC 6722
- Failure to abide by additional information reporting standards is punishable under IRC 6723
