Why be pessimistic? A long text in 4D speaks through the U.S. cryptocurrency tax
The U.S. Senate has been extremely lively and clamoring over the past two days.
They are discussing the “Infrastructure Investment and Employment Act,” which intends to impose $28 billion in taxes on the cryptocurrency sector.
The first to suffer is the miners and wallet dealers.
The protests in the cryptocurrency industry are extremely fierce. The CEOs of FTX and Coinbase have stepped up to speak out, believing that this will hinder American financial innovation.
Why is the U.S. cryptocurrency community’s reaction so intense?
What are the senators fighting over?
If this new US infrastructure bill is implemented, what impact will it have on the cryptocurrency industry?
This article will clarify these issues for you. Of course, the focus of this article is to explain the cryptocurrency tax in the United States in detail. I believe that after reading this article, you will have a more comprehensive and profound understanding of the cryptocurrency tax in the United States.
“The Senate Disturbance: Taxation is the Focus”
To understand this turmoil, the key is to understand what they are fighting for and why everyone has such big opinions.
First of all, this bill was proposed by the Biden administration. The full name is “Infrastructure Investment and Jobs Act.” Modernization of highways, transportation, and broadband networks in the United States.
The return on investment in cryptocurrency is huge, and it is naturally a tax target.
According to Forbes, the White House plans to spend $1 trillion, so it will collect $28 billion in taxes from the crypto community in the next ten years. So, who needs to pay this money? It is the core of the disputes between the various factions-“broker” (broker).
Everyone agrees that only brokers should be taxed. So the question is: who is the broker? Does mining count? Does writing code count? Do you count the wallet? Do you count on DEX?
It’s not so much worry about whether to collect taxes, it’s more about worrying about how much burden it will bring to cryptocurrency investors in the future. The founding father of the United States, Benjamin Franklin, once said: “There is only death and taxes in the world that are inevitable!”
The original text of the bill only mentions brokers, which is vague and needs to be amended . Therefore, regarding the scope of brokers, the Senate is divided into two major factions:
One group is the modification of Warner-Sinema-Portman , proposed by Mark Warner, Krysten Sinema, and Rob Portman, on behalf of the Ministry of Finance, advocating not to file tax returns for miners engaged in proof of work and proof of rights verification, but software developers and DeFi platforms need to file tax returns. .
The other faction is the Wyden-Toomey-Lummis revision , proposed by Pat Toomey, Cynthia Lummis, and Ron Wyden. The difference from the Warner version is that software developers, hardware manufacturers, and miners all need to be exempted.
Therefore, both factions are actually speaking out for the encryption community, but the Wyden version has a wider exemption range and is more friendly to technology developers.
Since August 10th is the last moment to vote on the bill itself, in order to discuss other content besides cryptocurrencies as soon as possible, the Senate finally passed the Warner-Sinema- by an overwhelming majority vote of 68 to 29 on August 8. Modifications to the Portman version.
The other faction is naturally unwilling. Lummis said, “I understand the position of my colleagues. But if the provisions of the bill are not changed, people will be very sad. I will continue to cheer tomorrow and try to persuade them, especially Schumer, that our version is actually It’s worth voting again.”
And FTX founder Sam Bankman-Fried, who donated $5.2 million to Biden’s presidential campaign, believes that if this bill passes, many crypto-related entities will have to leave the United States or even be forced to “close their doors.”
However, because the two factions have core common interests, they reached a compromise on August 9 and submitted an amendment supported by the Democratic Party, Republican Party and the Treasury Department.
Senator Toomey said at a press conference on August 9: “We did not mention too radical content. This compromise clarified: Brokers refer to legal persons who purchase, sell or exchange digital assets. “
In other words, miners who are responsible for verifying transactions do not provide other services; those who sell hardware and software wallets only generate private keys and give them to users, so they don’t have to pay taxes.
This compromise was also supported by Finance Minister Yellen. “These processes are very meaningful and help combat tax evasion in the cryptocurrency market.”
However, a dramatic scene happened on the venue:
Senator Richard Shelby, 87, suddenly proposed to increase military spending by $50 billion. Of course, this proposal was rejected. As a result, Shelby was very angry, saying that he would vote against all other people’s proposals in the future.
As a result, the final compromise and lobbying of the crypto community also failed.
Regardless of the outcome, U.S. cryptocurrency practitioners and investors have the same concern for taxation. What is different from Chinese investors is that the United States has more complicated tax requirements for investment, and may even directly change the trading strategy. If you do not have certain accounting expertise, it is easy to bring legal risks to yourself.
In addition, when discussing regulatory policies, we tend to pay too much attention to the monetary and securities authorities and forget the role played by the tax authorities. In fact, among all regulatory agencies, the tax department has the most thorough understanding of investors, and every profit and loss cannot escape investigation. This is beyond the reach of the Federal Reserve and the SEC.
Next, let’s take a look at why Americans are so worried about crypto taxes?
“In what circumstances will be taxed?”
The Internal Revenue Service (IRS) is part of the Treasury Department. In fact, it has long been eyeing cryptocurrencies, and there are requirements for system integrity.
As long as a taxable event occurs, you must file a tax return. Once the tax is filed, it is time to pay the tax.
The so-called “taxable event” refers to the situation in which the guidance comes or realizes the profit. The IRS proposed in the 2014 Circular 21 that the following are the “taxable events” of cryptocurrencies:
1. In fiat currency transactions, the cryptocurrency is exchanged for fiat currency
Emma bought 2 Ethereum from Coinbase for $1,200. A few months later, she sold the two Ethereums for $1,000.
Because the legal currency is exchanged, the process of selling is a “taxable event”. She needs to declare a capital loss of $200 on the IRS form. Since it is not a gain, this transaction can be tax-free.
2. Currency trading
John bought 5 Litecoins for $250. After holding the currency for a few months, he bought 0.5 Ethereum with these 5 Litecoins. At that time, the market value of 5 Litecoins had risen to $400.
This currency transaction is also a taxable event, and the IRS will treat it as an “asset disposal”. After the disposal, there will be a capital appreciation of $150, and it will also need to be taxed.
3. Use cryptocurrency to buy goods or services
Taylor has 5 bitcoins, all of which were bought at a price of $100 each before 2014. Later, Taylor used 3 bitcoins to buy a new Tesla car, worth $51,000.
For the IRS, this is considered a taxable event, because Taylor “disposed” Bitcoin in exchange for a new Tesla car. The entire process resulted in a capital gain of $50,700.
4. Other ways to “obtain” cryptocurrency
Jack is a miner. He can mine 0.5 bitcoins every day. He must admit that the 0.5 bitcoins he earns every day are “income”, and once they are sold, they realize capital gains.
In addition, if the cryptocurrency is obtained through other methods such as pledge, hard fork, reward, salary income, etc., it is regarded as this kind of “taxable event”. However, the IRS has only clearly defined a small part of them, and most of them are still gray areas.
The most controversial aspect of the crypto tax clause in the Infrastructure Act is that members of the crypto ecosystem such as miners who are not transaction-oriented, are they obliged to pay taxes?
If it must be collected, how and how much is taxed on such “acquired” coins? Obviously, the bill passed in a hurry has too much controversy and will inevitably cause an uproar in the United States.
Of course, not all cryptocurrency transactions are considered “taxable events.” Under what circumstances should it not be handed in?
1. Buy and hold coins
If you just buy cryptocurrency such as Bitcoin and keep it in your wallet, then you don’t need to file a tax return, because no capital gains or losses have been realized at this time. Only when it is sold can it be regarded as “disposal” and realize capital gains.
2. Transfer money between your own wallets
If you have two wallets, transferring money between them does not count as “disposing” of encrypted assets. After the transfer, you still hold these cryptocurrencies, so this is not a “taxable event”. However, hard forks are not considered “transfers”, but only alternative “acquisitions”.
Of course, what everyone is most concerned about is emerging financial forms, such as whether NFT and DeFi need to pay taxes, and how to pay taxes. Since the taxation algorithm in the United States is very complicated, we will introduce the taxation principles below.
In addition, you may be curious about the impact of the US tax law on China. In fact, if you are a “Resident Alien” in the United States, you must also pay taxes to the United States.
Even if a foreigner does not hold a “green card”, as long as he has lived in the United States for 183 days in the current year; or has lived in the United States for at least 31 days this year, and has stayed in the United States for 183 days in the current year and two years back. Will be recognized as a resident foreigner.
Even if we are not “resident foreigners”, we should also pay attention to tax regulatory policies, because although China has not yet clarified relevant tax policies, with the continuous improvement of the financial market, it is possible for China to introduce similar measures in the future.
” How to calculate how much tax to pay?”
Because of the different tax systems in various countries, the method of directly comparing tax rates in various countries is not very scientific for investors.
It only takes two steps to figure out how much taxes are paid in the US for currency speculation. After reading it, you will understand why American investors hate the tax law so much.
Step 1: Calculate capital gains
Here is a very simple formula, although accounting terminology seems a bit complicated:
Fair market value-cost basis = capital gain or loss
Fair market value (fair market value) is the price of an asset on the open market. Cost basis (cost basis) represents the cost of purchasing the property, including transaction fees.
To put it bluntly, it means subtracting the buying price from the selling price. For example, if you buy a Litecoin for $250, the cost basis is $250. When the Litecoin is successfully sold, the income is 400 US dollars. This transaction price is the fair market value. Substituting into the formula, we get: 400-250 = 150 (USD), and the final positive number represents capital gains.
Of course, the actual transaction record will be much more complicated than this example, but the core is this formula.
An analogy: Xiao Ming was in the United States, just entered the currency circle, and left such transaction records on Coinbase:
On January 1, 2020, I bought 1 Bitcoin at a transaction price of $12,000.
On February 2, 2020, I bought 1 Bitcoin at a transaction price of US$10,000.
On March 3, 2020, I bought 1 Bitcoin at a transaction price of US$8,000.
On April 4, 2020, buy 8 Ethereum with 0.5 Bitcoin. At this time, 0.5 Bitcoin is worth $4,000.
Since buying a holding currency is not a taxable event, in fact we only need to consider the capital gains from the April transaction.
The question is: How do you calculate the cost basis for buying 8 Ethereum with 0.5 Bitcoin?
First of all, since these 0.5 bitcoins were not just bought, the market price on April 4 cannot be used directly to calculate the cost of selling bitcoins, and the capital gain obtained in this way will always be 0. According to IRS regulations, one should go back to the 3 bitcoins previously bought at different prices to find the cost of 0.5 bitcoins.
In this case, the key is to determine which of the three bitcoins you are dealing with.
The accounting and taxation industry has special methods for determining the order of asset sales, such as the first-in first-out method (FIFO) and the last-in first-out method (LIFO). Generally, the first-in-first-out method is adopted, assuming that the first asset purchased is the first sold.
Going back to the example, the 0.5 bitcoins sold actually came from the 1 bitcoin purchased for the first time. The cost basis of this transaction is 0.5 bitcoins*12,000 USD/unit = 6000 USD.
Since the market value of this 0.5 bitcoin has fallen to $4,000 on April 4, we have to count it as a capital loss of $2,000 (4000-6000=-2000).
Therefore, after submitting this tax return, Xiao Ming does not have to pay any taxes for these transactions in 2020. But even so, this table must be handed in, and the data in it must be clearly listed.
Of course, if you use the last-in-first-out method for tax filing, the capital gain (loss) of this transaction is zero. The American General Accounting Standards (GAAP) allows companies to choose one of the first-in, first-out and last-in, first-out accounting methods, and there are bound to be differences in tax returns.
Step 2: Check the applicable tax rate
Then, after calculating the capital gains, how much tax should be paid? It depends on how long you have held it. It should be noted that these tax levels are based on the sum of the gains (losses) of all transactions in this tax year, not for a certain currency or transaction, or even for cryptocurrency only.
Short-term tax rate: held for less than one year
“Short-term” refers to the holding period of less than 12 months.
For example: if you buy 1 Ethereum for US$400 and sell it for US$600 after 5 months, then the capital gain of US$200 will fall into the category of “short-term capital gains”.
Short-term capital gains will not receive any special tax treatment (Special Tax Treatment), and the progressive tax rate will be levied directly according to the existing method.
The U.S. short-term capital gains tax rate is divided into three columns according to single, married, and head of household. The figures in the table are tax grades. Source: Cryptotrader.Tax tax company
It is worth mentioning that some investors may not understand what progressive tax rates are.
For example: through short-term investment, you get a net income of $25,000, which is the “capital gain (loss)” in the tax formula. Suppose you only apply the tax rate for single youth. Looking at the table, we can see that the gain of $25,000 corresponds to a progressive tax rate of 12%.
This is not to say that 12% is directly used to multiply US$25,000; it is to say that from the 0th US dollar to the first level of 9875 US dollars, the first level tax rate of 10% is applied to all the 9875 US dollars; from the 9876th US dollars From the beginning, the maximum value of the profit is 25,000 US dollars, and the second-tier tax rate is 12%. Therefore, as shown in the figure, the tax payable = 10% * 9875 + 12% * (25000-9875) = US$2802.5.
Progressive tax rate calculation method. Source: Cryptotrader.Tax tax company
Long-term tax rate: hold for more than one year
Correspondingly, holding currency for more than 12 months is considered a “long-term capital gain.” In order to encourage people to hold assets for a long time, rather than short-term speculative arbitrage, the government has introduced preferential tax policies.
The United States long-term capital gains tax rate is divided into three columns according to single, married and head of household. The numbers in the table are tax grades. Source: Cryptotrader.Tax tax company
This strength is great: even if you belong to the highest tax bracket, the long-term capital gains tax is only 20%, and the short-term capital gains tax is 37%.
This brings the idea of tax saving. First, since taxes are collected based on the capital gains (losses) on the right side of the formula, try to reduce the amount of gains as much as possible, or even intentionally create losses. Who makes “losses” not taxable? This is called tax loss harvesting (tax loss harvesting).
On the surface it is a loss, but in fact it reduces tax costs, and the overall investment income is still considerable. Domestic cryptocurrency investors are accustomed to looking at the profit formula given by the exchange without tax, which may not be easy to understand.
For example: Two Americans-Sam and Rachel are good friends. They agreed to buy 0.25 bitcoins each when the market price of bitcoin was $3,000 on a certain day, a certain year, and a certain day. Sam believes in Bitcoin and the concept of decentralization, and has been HODL still; Rachel is a smart girl who knows the strategy of tax loss harvesting, so when Bitcoin drops to $2,000, he first sells all 0.25 Bitcoins I went out, and then bought back 0.25 bitcoins at the same price with the received 2,000 US dollars.
This is very interesting: Neither person has to pay taxes for holding Bitcoin, but Rachel has won himself a capital loss of $1,000, which can play a key role in summarizing the benefits of different currencies.
Suppose two people earn 10,000 USD by selling Ethereum, Sam has to pay 9875*10%+(10000-9875)*12%=1002.5 USD tax for short-term operations because there is no “loss”, and Rachel has locked in In order to obtain the lowest tax level, only pay tax for the profit of 9,000 USD, that is, 9,000*10%=900 USD. The tax savings can be used to buy more coins.
Even if there are no other coins, but only later selling Bitcoin, Rachel can increase his after-tax investment income because of the self-selling and self-buying trick.
The second strategy is to obtain long-term capital gains and convert short-term interest rates into long-term interest rates. Before selling assets, investors need to carefully examine the investment portfolio to determine which ones are suitable for long-term holding and which ones are suitable for selling now. This requires a certain strategy.
Some professional encrypted taxation software can automatically evaluate, so as to help users obtain the highest after-tax profit, which can save tens of thousands of dollars in the long term.
In short, the trading strategies of American investors are very different from those of China.
” IRS: I know all your secrets”
The tax policy of the United States has rewritten the rules of the game to a large extent-whether it is centralized or decentralized finance, you must honestly explain what you have done, and you must hand over the data to the centralized tax authority and Taxation and accounting companies.
1. How does the IRS know that I have traded cryptocurrency?
The IRS has many ways to know that you are investing in cryptocurrency, and to see which income is not taxable. The most powerful is the 1099 reporting system.
Major exchanges such as Coinbase, Gemini, and Kraken will report certain types of trading activities to the IRS, which are reflected in the 1099-K and other forms.
The purpose of the 1099 series of forms is to understand the “non-employment income” of taxpayers. At the end of the year, the taxpayer and the IRS each have a copy of the 1099 series. If the exchange submits the 1099 form, but the IRS finds that you did not mention cryptocurrency income when filing your tax return, your exchange account will be suspended and you will receive an automatically sent CP2000 email warning you that you still have to Tax income has not been declared, please fulfill your tax obligations as soon as possible.
In addition to the 1099 series of forms, IRS will also work with professional blockchain analysis companies, such as Chainalysis, to directly check the transaction records on the chain.
Therefore, IRS is still very effective in investigating tax evasion and money laundering.
The chief criminal investigator of the IRS disclosed at a meeting how they used data science to conduct encrypted tax investigations. Source: Cointracker Tax Company
Of course, the IRS is too powerful and will inevitably lead to controversy. The reason why Senator Wyden persevered in changing both the original text of the bill and disagreeing with the text of the other faction is because if tax returns are also required for wallet service providers and miners, all users will have no privacy at all, and the entire decentralized finance Technology directly becomes empty talk.
Therefore, on August 9th, he was also looking forward to the compromise on Twitter:
“I don’t think that the existing amendments to the cryptocurrency terms are really good enough to protect privacy and security. But obviously, the passed version is much better than the original bill. Majority leader Chuck Schumer has already said that he It will not stop a unanimous motion.”
2. What happens if I don’t file a tax return?
Although tax declaration and payment are separate, if you deliberately fail to declare, you will be identified as tax fraud by the IRS.
Punishments include criminal proceedings against you , five years in jail, and a fine of up to $250,000 .
In the past two years, the IRS has made great efforts to crack down on illegal acts of encryption taxation. The IRS has sent tens of thousands of warning letters to Coinbase users, telling them that they have been involved in “incorrect” tax returns. The IRS has also updated the U.S. Income Tax Form 1040, which contains a question that all U.S. taxpayers must answer. If you answer it incorrectly, you will be suspected of perjury:
“During 2021, have you received, sold, exchanged, or otherwise disposed of a certain virtual currency to make a profit?”
Compared with 2020, the 1040 sample form in 2021 is slightly different from the text in the red box. It used to be “received, sold, sent, exchanged, or obtained any cryptocurrency gains”, and now focuses more on taxable income. Source: Today UK News
This rigorous review of encrypted assets reveals that it is possible that the number of related audits and criminal proceedings will continue to rise in the future, because cryptocurrencies are more and more integrated into the mainstream, and supervision will be stricter.
3. What should I do if I “forgot” to pay taxes?
Maybe you, like many people around you, sometimes “forget” that cryptocurrency-related income is taxed. Don’t be nervous at this time. Just fill in a 1040X correction form. It is better to be proactive and honest than to let the IRS come to the door when the time comes.
4. How many forms does the IRS need to receive?
90% of investors participate through purchases and sales. This type of encrypted income is counted as “capital gains”, corresponding to the first three taxable events.
If it is the fourth taxable event, it is the “acquisition” of cryptocurrency, such as receiving wages, mining, pledge or obtaining loan interest, such income is considered as “ordinary income” (ordinary income), there is a separate tax declaration requirement, Of course, it is currently the most controversial.
a. Capital gains tax
First, the realized capital gains or losses should be filled in the 8949 form. This form is used to declare the sales and disposal of encrypted assets. Traditional assets such as stocks and bonds also need to be filled in this form.
When filling in, taxpayers need to list all transactions, sales, and disposal of cryptocurrency, including the date of acquisition, transaction date, fair market value, cost basis, and capital gains (losses). Finally, calculate the total income and net income and fill them out at the bottom of the form.
The IRS form collects all the transaction details of the taxpayer. The picture shows Form 8949, which is applicable to the first three types of taxable events. Source: Cryptotrader.Tax tax company
b. General income tax
If you are speculating coins, you only need to fill in the 8949 form above. If you are “acquiring” cryptocurrency, you need to fill in different tables in the 1040 series according to the situation.
Schedule C -If you obtain cryptocurrency in the name of a business entity, such as receiving labor compensation or mining, it will be regarded as freelance income and you need to fill in Schedule C.
Attachment B -If you get interest on deposits and loans on the lending platform, you need to fill in Attachment B.
Attachment 1 -If the currency you get comes from airdrops, hard forks, salary and other channels, you need to fill in Attachment 1 and report it as “other types of income”.
Of course, for different investors, the IRS needs to collect several tables, and it still has to be analyzed in detail. At present, IRS only supports online filling of some forms, and most of them need to be filled out manually by the taxpayer and mailed to the past.
“The shattered dream of decentralization”
Some people may remember that at the end of July this year, Binance strengthened its compliance building and also launched a tax declaration API.
The official announcement stated that through the tax reporting tool API, Binance users can generate read-only user transaction history, capital gains and loss records, and send them to third-party tax reporting tools; they can also view local tax requirements in real time.
This brings up a new question: the technology is so advanced, why can’t IRS directly ask the exchange for data and import it automatically? Why do investors have to fill in the forms and pay taxes by themselves?
1. Why can’t the exchange provide accurate tax reports?
Remember the formula for calculating taxable profits? No matter which method is used, the premise is that a complete transaction record can support us to calculate the cost basis, fair market value and capital gains (losses) of each “disposal” of cryptocurrency assets. Without complete transaction records, these are impossible to talk about.
However, tracking the transaction status and capital changes of all exchanges, wallets, and agreements is a complex task.
It is difficult for exchanges such as Binance and Coinbase to directly provide accurate user tax reports. This is not because they deliberately evaded, but because of the transferability of cryptocurrencies.
Users transfer in and out of cryptocurrency very frequently, so the exchange cannot know when, where, and how you originally obtained the cryptocurrency on a high-cost basis. They can only track the whereabouts of assets after they enter the exchange.
Once you transfer the currency into or out of the exchange, they cannot accurately give the values of the two variables, the fair market value and the cost basis, which are necessary for tax filing.
The picture below is from Coinbase. They themselves admit that the generated user tax reports are not particularly accurate in many cases, such as:
- The user has bought or sold cryptocurrency on other exchanges;
- Send or receive cryptocurrency from a non-Coinbase wallet;
- Send or receive cryptocurrency from other exchanges including Coinbase Pro;
- Save digital assets to external storage devices;
- Participate in ICO;
- Have used cryptocurrency capital gains (losses) calculation methods other than the first-in first-out method.
This means that at least two-thirds of Coinbase users, that is, millions of people, have inaccurate tax reports.
Coinbase admits that the calculated capital gains are not necessarily accurate, source: Coinbase official website
The key to solving this problem is to integrate all data, including buying, selling, airdrops, forks, minting, swaps, gifts, etc., and putting them in the same place, so that a “complete” transaction history can be established record. The fair market value, cost basis and capital gains (losses) calculated in this way are reliable.
To do this, users have two choices: one is to manually organize each transaction record, copy and paste exchange and wallet data; the other is to automate this process and hand over the work to encrypted taxation software.
This actually gave birth to a new industry-third-party tax reporting tools.
Obviously, the IRS tax filing mechanism determines that no matter how decentralized the dream is, it will be shattered in front of the tax department .
2. How to use API to import transaction records into third-party platforms?
This type of software can generally be authorized by the user’s API to directly read the data of the head exchange, wallet, blockchain and DeFi protocol, thereby generating tax reports based on multi-platform transaction history.
The operation of the encrypted tax platform is roughly similar:
a. When adding data sources, select all exchanges, wallets and related platforms that you have used in recent years.
b. Upload transaction records. Through the exchange API authorization, or upload local CSV data, you can get your own exchange account information. But the connection time will be relatively long, and Binance’s newly launched tax API also takes more than half an hour to complete the data connection.
c. Click the mouse again to generate a tax report.
It should be noted that these APIs only help you complete the first step of tax filing. Once you have the report, you need to contact a tax expert or use tax reporting software such as TurboTax or TaxAct to complete the form. Complete the paper form and mail it to the IRS.
Of course, the separation of tax declaration and payment is a special system under the national conditions of the United States. Tax payment is very simple, you can use different methods such as debit card, credit card, mobile tax payment software, offline counter.
3. How to collect taxes for new financial formats?
Back to the questions that everyone cares about at the beginning of the article: NFT, DeFi, airdrops, etc., do I have to pay taxes now?
Answer: It is best to hand in, but not necessarily. Because the U.S. Congress is still arguing, the IRS cannot take care of so many business formats at once.
Note: The terms “recognize” income and “realize” income will be mentioned below, but the concepts are different. In the U.S. tax law, confirming income means confirming that you have “acquired” a piece of wealth, which corresponds to the fourth category of taxable events. If the asset is not sold, the “recognized” income is only a cost basis, not fair market value or capital gains.
This part is currently the focus of controversy in the Senate, and further amendments are not ruled out in the future. The current strategy adopted by the IRS is: 1. Differentiate between amateur mining and full-time mining; 2. Collect both personal income tax and capital gains tax.
If it is a professional mining, you need to fill in Schedule C of the 1040 series and register as a commercial entity. Even if there is only one person, it is considered “freelance” and requires filling out a form.
If it is amateur mining, you need to fill in Schedule 1 of the 1040 series, and apply for mining income as “other income” on line 21. The costs of mining, such as electricity fees and mining machine fees, must be registered on the same series of Schedule A.
In theory, miners need to pay double taxation. For example: Charlie dug a bitcoin on August 1st at a price of 40,000 US dollars; later sold at a price of 42,000 US dollars, and realized a gain of 2,000 US dollars, this part of the capital gains tax receivable; but some people have advocated A general income tax is also levied on the initial $40,000.
After all, mining is different from trading, so there is still a lot of gray space at present, and the taxation of miners will inevitably become the focus of discussion in the US Congress, administrative agencies, and industry insiders in the future.
From a tax perspective, NFT, like cryptocurrency, belongs to property. Therefore, if you buy an NFT and sell it again soon, resulting in a capital gain or loss, it should also be declared in the 8949 form of the IRS.
The IRS specifically discussed airdrops and hard forks in its revised document No. 24 of 2019. As far as the airdrop is concerned, the new currency is obtained, so from the moment it is included in the taxpayer’s wallet, even if the currency is “obtained”, it is only a cost basis. In other words, if you don’t sell the airdropped coins, you don’t have to pay taxes .
George received 400 UNI tokens from Uniswap airdrop in September 2020. At that time, the price of UNI was US$3.5 each, so when these tokens were obtained, it was equivalent to receiving US$1,400. This $1,400 is his cost basis.
If two months later, George sells these 400 UNIs and obtains $2,000, it becomes a taxable event and realizes a capital gain of $600.
d. Hard fork
When a hard fork occurs, if you obtain a new fork currency through exchange, it will be included in the new cost basis. If you don’t receive new coins, just don’t care .
Megan held 2.5 Bitcoins in July 2017 and received 2.5 BCH after the BCH hard fork. At this time, revenue needs to be recognized. Based on the fair market value at the time (US$500 each), revenue of US$1,250 is recognized. This $1,250 is the cost basis of BCH. If you sell it, you will have to pay taxes.
e. Loan interest
Mitchell makes a profit by lending cryptocurrency. In September, by lending ETH, he earned 0.2 ETH in interest. Assuming that 0.2 ETH was worth $120 at the time, he would even confirm an ordinary income of $120 .
f. Margin trading
Exchanges such as BitMEX have greatly promoted margin trading. The IRS does not provide a clear guidance document on the taxation of margin transactions, and can only roughly speculate as follows:
Margin trading is a financing transaction from an exchange, and repayment of principal and interest after a period of time. For the sake of insurance, the tax company recommends to treat the borrowed funds as their own investment, and then report capital gains tax based on the profit or loss of the margin transaction.
g. Give away cryptocurrency
There is no tax for gifts, but there is a quota. Every friend or family member receives a cryptocurrency value of less than US$15,000, so there is no need to pay taxes. This is also a tax-saving method.
h. Donate cryptocurrency
Donation of cryptocurrency does not have to pay tax , as long as the recipient is a registered charity in the United States. If you donate more than US$500, you must fill out Form 8283. How much tax can be reduced on the donated coins depends on the length of time you hold the assets. Holding it for more than 1 year can reduce the total taxable annual income (AIG), but it can only be reduced by up to 30%. Holding for less than 1 year can reduce the total taxable annual income by up to 50%.
In short, since the ecology of cryptocurrency is much richer than that of the stock and bond markets, involving new technologies such as forks, mining, wallets, etc., whether traditional asset taxation methods are applicable, or whether taxation should be paid, will naturally become the focus of the game between all parties. .
“Why be pessimistic?”
Many people feel pessimistic about the taxation policy of the United States, and feel that this is another major regulatory challenge facing the crypto community after China.
But from a rational point of view, the impact of this bill will not be particularly large.
First, the infrastructure bill may not necessarily be passed in the Senate; second, even if it passes, the worst case is to keep the original text. The vague definition of “broker” can be clarified in the future; again, according to the US system, after the Senate passes, it still needs to be clarified. The House of Representatives deliberates, and when the texts of the two chambers are inconsistent, they must be reviewed by a special committee before they can be signed by the president. Finally, the president himself has the right to veto.
This discussion has activated the enthusiasm of all parties in the overall ecology and made everyone treat this new thing with a positive attitude. At least through this controversy in the U.S. Senate, many KOLs have already made their appearances, reflecting the spirit of unity in the decentralized community. It is already a good thing that the Democrats, Republicans, and the Treasury Department, including Treasury Secretary Yellen, can hardly reach a consensus.
Although the definition of “broker” is very different, the advantages of this debate outweigh the disadvantages. Through the talks of all parties, we can more clearly understand the respective roles and functions of the technical parties and transaction parties in the encryption ecosystem, thereby pushing technological and financial innovation to a new level.
The taxation of encrypted transactions itself has to some extent declared the legality of this technology and assets. Clarifying the details is more conducive to the mainstream of this circle. When the technology itself is also developing, the policy will definitely have tolerance and delay, and there is no need to be particularly pessimistic.
All in all, whether this infrastructure bill itself is passed is not the most important thing. The tax regulatory framework of the US IRS and other countries will become more and more mature, which will enable the industry to move in a more rational direction.
1. U.S. Senators Forge Crypto Tax Reporting Rules Over The Weekend
2. Lone Senator Rejects Crypto Provision in Infrastructure Bill
3. The Ultimate Crypto Tax Guide (2021)
4. Cryptocurrency & Bitcoin Tax Guide (2021 Edition)
5. The Biden administration forced a new tax plan to “crush the cryptocurrency ecosystem”, and SBF and others voiced their opposition
6. “How to prepare virtual currency tax returns”
7. Crypto Tax Loss Harvesting: A Complete Guide
8. The State Administration of Taxation of the People’s Republic of China “Guidelines for the Taxation of Chinese Residents Investing in the U.S.”
9. China National People’s Congress Network “U.S. Congress”
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/why-be-pessimistic-a-long-text-in-4d-speaks-through-the-u-s-cryptocurrency-tax/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.