Cryptocurrencies are classified as property for tax purposes by the IRS, meaning that they are subject to capital gains tax.
Capital gains tax is applied to the difference between the purchase price and the sale price of cryptocurrency and is taxed as ordinary income or capital gains, depending on the holding period.
Short-term capital gains, which are gains from assets held for less than one year, are taxed as ordinary income, while long-term capital gains, which are gains from assets held for more than one year, are taxed at a lower rate.
Cryptocurrency transactions conducted in foreign countries are subject to foreign currency exchange rates and may result in additional tax obligations.
The IRS has increased enforcement efforts related to cryptocurrency taxation, including the issuance of John Doe summons and the development of a cryptocurrency compliance program.
Cryptocurrency taxpayers may benefit from seeking the assistance of a tax professional, such as a CPA or attorney, to ensure compliance with all tax obligations and minimize potential tax liabilities.