Governments across the world are taking notice of the substantial profits many cryptocurrency investors have been making. But there are many different approaches to taxation across the globe.
For example, in the United States, cryptocurrency is defined as “property” by the Internal Revenue Service (IRS), just like stocks or real estate. Any disposal of property is subject to a capital gains tax while earning property is subject to an income tax.
Considering this, your cryptocurrency activities may impact your 2022 tax bill.
In this blog post, we will discuss taxable crypto activities, the essentials you need to know about crypto taxes, and the tools you may need to record your crypto activity and calculate crypto tax liabilities.
What are applicable crypto taxes?
With your cryptocurrency activities, you will typically be faced with three different taxes:
- capital gains tax
- income tax
- sales tax
Which crypto activities are taxable?
Below are the crypto activities that could incur the above-mentioned taxes.
Selling cryptocurrency
If you sell cryptocurrency for a profit, you owe capital gains tax on the profit amount. Capital gains are the growth in the value of an investment, and it is taxed when an individual or an entity sells their holdings.
However, if you sell cryptocurrency at a loss instead, you do not owe capital gains tax for that transaction.
Trading cryptocurrency and increasing your coin balance does not count as capital gains either, as long as you do not profit in U.S. Dollar terms.
2. Cryptocurrency payments
Using cryptocurrency to purchase goods or services is counted as the sale of that cryptocurrency, so you will owe capital gains tax if its market value is higher than the price you bought it.
In addition, you will also owe any applicable sales tax that is generated by that transaction.
3. Crypto staking and mining rewards
Cryptocurrency staking and mining rewards are regarded as “earnings” according to the IRS, so they are liable to incur a regular income tax. You owe income tax on the market value of each reward disbursement, on the day you receive it. The tax rate you pay varies from state to state.
On the other hand, if you hold your staking and mining rewards and later sell at a profit, you also owe capital gains taxes on those profits, based on how long you have held them.
4. Earnings from playing crypto games (play-to-earn)
Earning tokens by playing cryptocurrency games is in practice the same thing as earning staking or mining rewards. Due to this, play-to-earn rewards are subject to the same income tax that applies to staking and mining.
If you earn cryptocurrency tokens from a game, you need to report them as income based on their fair market value at the time you receive them.
And just like staking and mining rewards, when you sell your play-to-earn reward tokens later at a profit, you will additionally incur a capital gains tax.
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