Is Converting Crypto taxable: A Complete Guide

Cryptocurrency is a mode of payment nowadays. 

This fintech innovation is innovating users’ financial experiences in many ways. 

Many businesses are also showing interest in this fintech innovation to a great deal.  

This has grabbed the attention of government authorities in the United States. 

Many crypto investors, traders, and HODLERS want their financial interests to be safe. 

They want government authorities to regulate and tax cryptocurrencies for this. 

The IRS (Internal Revenue Service) has taken steps in this direction. 

When do you have to pay capital gains tax on crypto in the United States?

All crypto enthusiasts in the United States will pay Capital Gains Tax for the following reasons: 

  • The exchange of this fintech-based innovation with FIAT currency.
  • For gifting someone cryptocurrency
  • Payment with cryptocurrency for buying goods, services, and even NFTs. 
  • Swapping or trading a cryptocurrency asset for another.

 The Internal Revenue System has not provided any clarification about taxes on the following:

  • Minting coins, tokens, NFTs, and interest-bearing assets.
  • Liquidity withdrawal and deposit through DeFi liquidity pools with the help of liquidity providers. 

Is crypto conversion taxable? 

This is a million-dollar question. 

This question is spinning inside the heads of many crypto enthusiasts. 

All of them want an answer to this question.

Read this post till the end, and you will get answers to many more questions about it. 

Tax on Crypto Swap:

You will have to pay tax for swapping one cryptocurrency for another. 

It is like selling one crypto for USD and then using it to purchase another crypto. 

This also includes conversion to a stablecoin like USDC. 

This is applicable in terms of Non-fungible tokens and Utility tokens. 

 It is because all this creates capital gains. 

 Is payment in the form of crypto taxable?

Many businesses have started accepting cryptocurrencies as a mode of payment. 

Global corporate bigwigs like Tesla and Amazon are an example of it. 

Both of these brands are accepting cryptocurrencies as a mode of payment. 

Payments for anything using cryptocurrency grab the eyeballs of the IRS to levy taxes on you. 

It is also similar to selling crypto for USD. 

This ensures either capital gains or losses. 

 Are non-fungible tokens and DeFi taxable? 

Many crypto enthusiasts in all parts of the United States want to know about it. 

NFTs are taxable like cryptocurrency. 

However, IRS has not released any guidelines or instructions about taxes on NFTs. 

If Mr.  Shehan Chandrasekera, CPA and head of tax strategy at CoinTracker.io, is to be believed, tax rules on any NFT depend on two things. 

  • Who are you? Are you an NFT creator or an Investor? 
  • To the extent of your interaction with NFTs. 

NFT creators or minters need to know two things. 

  • Events that make NFTs taxable. 
  • How NFT creators and minters are taxed?

Those who create or mint NFTs as a hobby or profession must pay taxes. The sale or exchange of an NFT for another NFT is also taxable. 

NFT investors and traders are taxed like crypto investors and traders. Buying or selling an NFT using cryptocurrency like Ethereum creates Capital Gains Tax. 

The amount of tax depends on two things:

  • The duration of time you hold an NFT for. 
  • The amount of your profit or loss. 

 You have the right to claim your losses on non-fungible tokens in your taxes, says he. 

 How are you taxed for DeFi?

Tax rules for DeFi or Decentralized Finance can confuse anybody. This confusion makes the brain of DeFi enthusiasts a production house question. 

Do not be impressed with the interest you earn on DeFi Loans. You should know about the way things are structured on the DeFi platform of your choice. 

 You will need to hire an experienced CPA in the United States for multiple reasons. For example: 

  • If you are earning a bag full of money. 
  • If you are involved in DeFi transactions, transactions, or mining activities. 

A CPA will help you determine many things. An experienced CPA will prepare a solid tax payment and tax-saving strategy to help you save money. 

The list of cryptocurrency income taxable events:

 All crypto investors, traders, and HODLERS must know about it. 

Your income from cryptocurrency is taxable under the following circumstances: 

  • Cryptocurrency earned as mining or staking rewards. 
  • If you are charging your customers cryptocurrency for selling them your goods or services. 
  • Receiving cryptocurrency through an airdrop. 
  • Cryptocurrency earned through play-to-earn games.

All rewards earned from activities related to cryptocurrency mining fall in the category of ordinary income. 

The government recognizes cryptocurrency staking rewards as passive income. 

This is why cryptocurrency mining and staking rewards are taxable. 

You will have to pay taxes for the cryptocurrency you receive as a mode of payment. 

This payment could be for anything. 

You will have to pay tax even if your employer pays your salary in the form of cryptocurrency. 

All types of payments received in the form of cryptocurrency create taxable events. 

The IRS has made it mandatory for crypto enthusiasts to report every airdrop. 

The IRS has released a clear set of guidelines about it. 

These guidelines are for reputed cryptocurrencies like BTC and ETH only. 

You will have to pay tax for NFTs and utility tokens like you pay tax on cryptocurrency. 

You will have to pay tax on selling the crypto you have received through the airdrop. 

The amount of tax depends on the value you sell it for. 

 Will you have to pay tax on buying, transferring, and donating crypto?

Buying cryptocurrency is not taxable. You are not under compulsion to check “Yes” on cryptocurrency-related questions in the tax return form. 

You do not have to pay tax for holding on to crypto that multiplies in terms of value on the market front. 

But you will have to pay tax for selling, swapping, trading, or disposing of such crypto. It is because you are getting income and profit from it. 

Remember, you do not have to pay any tax for transferring your cryptocurrency from one exchange or wallet to another. But you will have to pay tax on cryptocurrency transactions. 

Gifting crypto to family and friends within annual or lifetime limits is not taxable. 

The lifetime limit is $11.7 million.

The annual limit for 2021 was $15,000 per recipient.

You will need to ensure two more things. 

  • The crypto you are gifting must be No-string attached. 
  • Giving up control of the crypto you gift is mandatory.

Do you donate cryptocurrency to a qualified non-profit? The government wants you to report it. 

You will not be taxed for it. 

But you can be taxed for it.

Got confused?

Let us clear the air for you. 

You can be taxed for it only when you get your crypto converted to cash.  

Remember, donating crypto that multiplies in terms of the financial value does not create capital gains. 

You can donate crypto to a qualified non-profit to decrease your bill and save money on tax. 

What happens if you lose money in cryptocurrency?

The IRS recommends you report your loss for two reasons to save money. 

First, the crypto exchange of your choice always sends information about your transactions to the IRS.

The information IRS receives never includes your losses. 

This puts IRS under the impression that you owe more than you do.

 You can be taxed more for it. 

The correction of this mistake could be more time-consuming and expensive for you. We suggest you report it properly in the first place. 

Second, capital losses reduce the impact of tax on your income from capital gains. The amount of crypto taxes you owe reduces significantly. 

You can utilize and carry forward losses to offset your regular income and future gains. 

What else do you want to know about taxes on crypto? Do you deal in crypto? Do you want to save your money from taxes on crypto? 

We can help you. 

Just message or call us once to discuss your queries. 

We will then see the way we can help you.

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