- IRS treats crypto as property, taxing gains from sales or exchanges.
- Long-term crypto holdings benefit from lower capital gains rates.
- Airdrops, gifts and mining income must be reported to avoid IRS penalties.
U.S. cryptocurrency investors must follow IRS laws before the tax filing deadline. Individuals must file their 2024 tax returns to the IRS before April 15th, 2025. Investors must understand both crypto tax rules and the correct methods to report these transactions to the IRS.
Capital Gains Tax in Crypto
The IRS treats cryptocurrencies as property which creates tax obligations for capital gains from crypto transactions. Investors must report profits or losses from cryptocurrency transactions based on the purchase price. Investors who hold their crypto assets for more than one year qualify for long-term capital gains tax rates that are lower than short-term rates.
The IRS taxes short-term capital gains as ordinary income when crypto is sold less than a year after purchase.These gains are subject to tax rates of 10% to 37% based on the investor’s income. The Long-term capital gains are subjected to 0%, 15%, or 20% tax which benefits those who hold crypto for more than a year.
A capital gain occurs when you sell crypto for more than the purchase price which leads to tax responsibilities. However, a capital loss on crypto transactions could decrease the payable tax for investors. All investors must report correct data about gains and losses to the IRS to avoid penalties.
Other Taxable Crypto Events
Crypto income earned from mining or staking activities is subject to income tax. All investors must declare crypto assets obtained as payment for services and referral bonus awards as ordinary income. Investors should track their source of income carefully because different tax treatments apply between capital gains and transactions.
Crypto tokens received from airdrops or free distribution are treated as ordinary income at the time when they are received. The IRS determines the taxable income on these tokens as per their market price during the time held by the investor. However, any profits from the sale of these tokens after receipt is subject to capital gains tax.
Crypto gifts are exempt from taxation at the time of transfer unless they exceed certain thresholds. Donors must file a gift tax return whenever a gift exceeds $18,000. The recipient must then determine capital gains based on the original cost basis of the gifted crypto assets.
Investors must maintain correct records of all crypto transactions such as purchases, sales and gifts. These records ensure tax compliance and decrease tax error. With these elements crypto investors can handle the tax season with ease and avoid unnecessary tax penalties.