Crypto Taxation in USA: A Comprehensive Guide to Navigating Digital Assets and Taxation

By Prashant Thakur

"Crypto Taxation in USA " is a comprehensive book for everyone from crypto investors to tax professionals, offering a detailed overview of how the IRS taxes digital asset transactions when actual tax law that applies to digital assets are still to be enacted by Congress. Discover what constitutes a taxable event—from trading and staking to mining and even airdrops of cryptocurrencies. The guide also delves into hot topics like the taxation of NFT transactions and Initial Coin Offerings (ICOs)by blockchain companies. Stay current with the latest IRS guidelines, including new memos and revenue rulings updated for 2023. Whether you're a seasoned investor or a crypto newbie, this book equips you with the knowledge to make informed financial decisions in the ever-evolving world of cryptocurrency. Here are the list of topics covered :

What is a cryptocurrency under US Tax law ?

What are the taxable events for cryptocurrency transactions?

How is gain or loss on the sale of crypto taxed?

How IRS tax staking rewards ?

Taxation of receipt of cryptos by airdrops.

How IRS tax receipt of cryptos on hard-fork ?

How is the gift of cryptocurrencies taxed ?

How are cryptocurrencies rewarded on mining taxed?

How is the swapping or exchange of cryptocurrencies taxed ?

How is the payment of cryptocurrencies for goods or services creates taxable event?

How do NFT transactions get taxed?

What are the Reporting Requirements for Crypto transactions?

Can you offset losses of crypto trades ?

Can you claim diminution in value of cryptocurrency ?

Can you argue “theft “ by the crypto exchange and claim loss under section 165 ?

Whether exchanging cryptocurrencies qualify for like-kind exchange under section 1031 ?

Is reporting of digital currency in a foreign account required?

Claiming deduction for donating cryptocurrencies to charities .

Is the rule of "backup withholding" applicable to payments through cryptocurrencies?

How is the Initial Coin Offerings taxed ?

• Language: English
• Publisher: Publishdrive
• Release date: Sep 26, 2023
• ISBN: 9798890081476

Book preview

cover-image, Crypto Book

Crypto Taxation in USA

As on 1st September 2023

Simplifying the complex US tax law on taxation of crypto transactions for common investors.

By Prashant Kr. Thakur

©Prashant Thakur

The purpose of writing this book is simple! Explain various aspects of the taxation of cryptocurrencies to ordinary investors in a language they can understand. Since Congress has passed no law and the burden of taxing is on the shoulders of the IRS, it becomes tough for crypto investors to conclude on the taxation angle of crypto transactions.

I have tried to restrict the legal jargon to the minimum. My intended readers are ordinary people who have yet to learn about the law besides reading blogs and googling their queries. Almost all the topics related to the taxation of digital asset are discussed, and relevant Revenue Ruling Terms are also included at the end of the book.

Readers are, however, advised to consult their tax advisors before applying any of the conclusions/opinions given in the book. This is because the tax applies to peculiar facts in each taxpayer’s case.

Prashant Kr. Thakur

House No 705, 1st Floor

Chandigarh

India -160036

[e-mail]

www.irstaxapp.com

www.taxworry.com

Topics

1. 7 quick bytes about  cryptocurrency under US tax law ?

2.What are the taxable events for cryptocurrency transactions?

3. How is gain or loss on the sale of crypto taxed?

4. How IRS tax staking rewards ?

5. Taxation of receipt of cryptos by airdrops.

6. How IRS tax receipt of cryptos on hard-fork ?

7. How is the gift of cryptocurrencies taxed ?

8. How are cryptocurrencies rewarded on mining taxed?

9. How is the swapping or  exchange of cryptocurrencies taxed ?

10. How is the payment of  cryptocurrencies for goods or services creates taxable event?

11.  How do NFT transactions get taxed?

12. What are the Reporting Requirements for Crypto transactions?

13. Can you offset losses of crypto trades  ?

14. Can you claim diminution in value of cryptocurrency ?

15. Can you argue theft by the crypto exchange and claim loss under section 165 ?

16. Whether exchanging cryptocurrencies qualify for like-kind exchange under section 1031 ?

17. Is reporting of digital currency in a foreign account required?

18. Claiming deduction for donating cryptocurrencies to charities .

19. Is the rule of backup withholding applicable to payments through cryptocurrencies?

20. How is the Initial Coin Offerings taxed ?

Part B-IRS Guidance on Digital Asset Transactions

1IRS Notice 2014-21

2.Notice 2023-34

3 Revenue Ruling 2019-24

4 Revenue Ruling 2023-14

5 Chief Counsel Advice Memorandum dt 8/28/2020

6 Chief Counsel Memorandum 202302012 dt 13th January 2023

7 Notice 2023-27 , March 2023

Part C-The Basics of Cryptocurrency

Part D : Terms Commonly Used in Crypto World

About Prashant Kr Thakur

1. 7 quick bytes about  cryptocurrency under US tax law ?

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Under the Internal Revenue Code, cryptocurrencies are digital assets treated as property. Therefore, tax laws for property transactions also apply to transactions related to digital assets. In other words, like your house or other investments like shares jewellery, the digital assets transaction will give rise to Capital Gains or Losses.

What is Digital Assets?

Section 6045(g)(3)(D) of the Internal Revenue Code defines the term digital asset as a digital representation of value recorded on a cryptographically secured distributed ledger or any similar technology. So, a digital asset for tax laws in the USA means to include (but is not limited to):

• Convertible virtual currency and cryptocurrency

• Stablecoins

• Non-fungible tokens (NFTs)

Digital assets, or cryptocurrencies, are not fiat currencies because a government's central bank does not issue them as a currency. Some digital assets can be converted to real cash or substitute real money in crypto exchanges.

Those cryptocurrencies are often referred to as convertible virtual currency. For example, Bitcoin (BTC) or Ethereum (ETH) can be exchanged for goods, services, real currencies, or other digital assets.

So, if the digital asset is treated as property, how does that affect transactions in digital assets?

Treating the digital asset means that a person holding or transacting in digital assets as an investment must comply with the following laws, which apply to assets that are treated as property.

1. The sale or exchange of digital assets held as an investment will give rise to Capital Gains and Losses.

In the US, cryptocurrencies are treated as property. Therefore, if you held the digital assets as investment, the sale or exchange of digital assets will be subject to capital gains taxes. If you sell, trade, or otherwise dispose of your cryptocurrency for more than you acquired it, you must pay capital gains tax on the difference. Similarly, if you sell for less than you acquired it for, you may be able to deduct the loss.

2. Selling cryptocurrencies held as stock-in-trade gives rise to ordinary income.

If you are in the trade or business of dealing in cryptocurrency, selling or exchanging cryptocurrency will give rise to ordinary gain or loss. Remember, capital gains on the sale or exchange of cryptocurrencies arise when you hold it as an investment.

3. Receiving the property is ordinary income as per IRC § 61).

If you receive cryptocurrency as compensation for goods or services, it is treated as ordinary income. This applies whether you're an individual or a business. The fair market value (FMV) of the cryptocurrency in US dollars as of the date of receipt of digital asset is the income.

4. Gift of digital assets is liable to Gift Tax as per IRC 2501.

You will be liable to gift tax if you gift cryptocurrency valued more than the annual gift tax exclusion amount ($17,000 as of 2023).

5. Reporting Foreign Accounts if you hold digital assets.

Holding more than $10,000 in foreign cryptocurrency exchanges?? You must file Form 8938 or FinCen Form 114a Report of Foreign Bank and Financial Accounts (FBAR).

6. Report requirements by business on cash receipts

If a business receives $10,000 or more in cash in a transaction, it must report the transaction to the IRS on Form 8300. This rule has been extended to cryptocurrency transactions, so businesses that accept payments of $10,000 or more in cryptocurrency must also report that to the IRS.

7. Record keeping Requirements for property as per 26 USC § 6001).

Like any other type of property (capital asset ), you must keep records of your cryptocurrency transactions to calculate your tax liability accurately.

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2. What are the taxable events for cryptocurrency transactions?

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As per US tax law, several taxable events may arise when you receive or transfer cryptocurrency. These taxable events in crypto transactions imply tax liability and reporting to the IRS for cryptocurrency transactions. This is so because the IRS treats cryptocurrency as property for tax purposes, which means rules of recognising income or loss out of the sale, transfer, exchange, etc., shall apply. Apart from this, if you do not transfer but are a beneficiary of the crypto transfer to you, it shall also be counted for your tax liability. 

List of cryptocurrency taxable events

Here is the list of taxable events that may occur when you transfer your crypto or receive cryptocurrencies :

1. Selling cryptocurrency

You may trigger a taxable event if you sell cryptocurrency to anyone, including cryptocurrency exchanges. Since the IRS considers the cryptocurrency a property as defined in IRC 317(a), the sale may result in a capital gain or loss. Read "How is gain or loss on sale of crypto taxed ?"

2. Trading or exchanging cryptocurrency

In cryptocurrency, you can swap one crypto with another, whether or not both belong to the same blockchain network. Since cryptocurrency is a property or asset in the eyes of US law ( read the IRS Revenue Proc. & Rulings), exchange or barter of coins will be considered as a transfer of property with consequences of capital gains.So, the swapping of cryptocurrencies is a taxable event. To know more about the crypto swap and its taxation impact, Read How is the trading or exchange of cryptocurrencies taxed ?"

3. Receiving cryptocurrency as payment

Suppose you accept cryptocurrency as payment for goods or services. In that case, the cryptocurrency’s fair market value at receipt time is considered business income (sale turnover ) and taken for computation of profit & loss of the business. Read the chapter Computing business income if payment is accepted in crypto.

4. Mining cryptocurrency

Mining cryptocurrency