Taxation of Cryptocurrency
The taxation of cryptocurrency in the US
These are some important points to consider regarding US cryptocurrency tax laws. These notes provide an overview of key topics in crypto taxation:
Airdrops and Forked Currency
Airdrops are taxed as ordinary income for US tax purposes, even if no services are performed, as outlined in Revenue Ruling 2019-24. This approach differs from the UK’s. Forked currency is taxed when the taxpayer gains the ability to "exercise dominion and control" over the currency. Forking is considered ordinary income.
Mining and Staking
If the taxpayer performs a service, such as mining, the income is considered self-employment (SE) income. Similarly, staking income may be classified as self-employment income. However, there is ongoing debate about whether staking should be treated as Schedule 1 income (not subject to self-employment tax) for US taxpayers. Clear guidance is still pending.
Cryptocurrency as Personal Property
Cryptocurrency is treated as personal property, not a security, meaning no wash sale rules apply in 95% of situations. Some exchanges may pay "interest" on crypto holdings, which is not considered "rent" and therefore doesn’t involve amortization. This interest income should be reported on Schedule 1. Note that interest from staking differs from the interest paid by exchanges.
Taxation on Gifts and Appreciated Property
The usual gift tax rules apply when crypto is gifted, just as with any appreciated property. The tax treatment follows the usual rules for appreciated property when it is disposed of.
IRS Reporting Requirements
The IRS form question on "acquired" has been updated. It now refers to "disposed" rather than implying a purchase with real money, effective from the 2021 tax year onward. Currently, there is no requirement to report crypto holdings on the FBAR, but FinCEN 2020-2 indicates potential changes, though these have not yet been implemented. There are no clear rules regarding FATCA, though reporting on Form 8938 (if required) is advised.
Rewards for Loaning Crypto
Some exchanges offer rewards for "loaning" crypto back to them. However, this could be considered a sale, potentially triggering a tax event.
Robinhood and Crypto
Clients using Robinhood should exercise caution. The platform has evolved into a small crypto exchange in addition to a brokerage. Holding shares in Robinhood itself may mean holding some crypto, which is not the case with typical brokerage firms.
Taxation of NFTs
NFTs are likely to be taxed as collectibles at a 28% rate, as mentioned in other articles. However, no official IRS guidance on this has been released yet.
Loss of Access to Digital Wallet
If a client loses the key to their digital wallet, they cannot claim a deduction on Form 8949. However, it may be possible to claim the loss as abandoned property on Form 4797, but consulting a tax attorney is recommended. Please note that the theft and loss deduction has been removed under the TCJA.
Staking Income
On July 31, 2023, the IRS released Revenue Ruling 2023-14, which concludes that the fair market value of staking rewards received by a cash-method taxpayer is includible in the taxpayer’s gross income for the tax year in which the taxpayer gains "dominion and control" over the staking rewards.
The Taxation of Cryptoassets in the UK
As a general rule, individuals will be liable for Capital Gains Tax (CGT) when disposing of cryptoassets, just as they would for any other asset held for personal investment. Tax may also be due at ordinary income tax rates if an individual is running a business that deals in the trading of cryptoassets. National Insurance would also apply in this case.
When tokens are awarded for verifying additions to the blockchain ledger (mining), these are considered income taxable at regular income tax rates. Similarly, any tokens received through staking or airdrops where a service has been performed are subject to income tax. If no service has been performed, income tax may not apply, but this will be determined on a case-by-case basis, depending on the facts and circumstances.
It’s also important to note that HMRC views different cryptocurrencies as separate assets. For example, exchanging Bitcoin for Ethereum triggers a taxable event upon closing the position on Bitcoin. Similarly, using cryptocurrency to purchase goods or services is considered a taxable event, as the cryptocurrency is effectively exchanged for the cash value of the purchased item.
Taxpayers should be particularly cautious if they expect to realize capital gains (crypto and non-crypto) exceeding the Annual Exemption Allowance (currently £3,000). The high-volume nature of cryptocurrency trading often results in numerous reportable transactions, which can lead to increased compliance fees.
Things to consider for US citizens resident in the UK
The tax treatment of cryptocurrencies is a complex and developing topic. Much of the current advice from professional tax preparers is based on guidance notes rather than applicable legislation. We recommend that all taxpayers obtain professional advice before investing in any cryptoassets.
These are some important points to consider regarding US cryptocurrency tax laws. These notes provide an overview of key topics in crypto taxation:
Airdrops and Forked Currency
Airdrops are taxed as ordinary income for US tax purposes, even if no services are performed, as outlined in Revenue Ruling 2019-24. This approach differs from the UK’s. Forked currency is taxed when the taxpayer gains the ability to "exercise dominion and control" over the currency. Forking is considered ordinary income.
Mining and Staking
If the taxpayer performs a service, such as mining, the income is considered self-employment (SE) income. Similarly, staking income may be classified as self-employment income. However, there is ongoing debate about whether staking should be treated as Schedule 1 income (not subject to self-employment tax) for US taxpayers. Clear guidance is still pending.
Cryptocurrency as Personal Property
Cryptocurrency is treated as personal property, not a security, meaning no wash sale rules apply in 95% of situations. Some exchanges may pay "interest" on crypto holdings, which is not considered "rent" and therefore doesn’t involve amortization. This interest income should be reported on Schedule 1. Note that interest from staking differs from the interest paid by exchanges.
Taxation on Gifts and Appreciated Property
The usual gift tax rules apply when crypto is gifted, just as with any appreciated property. The tax treatment follows the usual rules for appreciated property when it is disposed of.
IRS Reporting Requirements
The IRS form question on "acquired" has been updated. It now refers to "disposed" rather than implying a purchase with real money, effective from the 2021 tax year onward. Currently, there is no requirement to report crypto holdings on the FBAR, but FinCEN 2020-2 indicates potential changes, though these have not yet been implemented. There are no clear rules regarding FATCA, though reporting on Form 8938 (if required) is advised.
Rewards for Loaning Crypto
Some exchanges offer rewards for "loaning" crypto back to them. However, this could be considered a sale, potentially triggering a tax event.
Robinhood and Crypto
Clients using Robinhood should exercise caution. The platform has evolved into a small crypto exchange in addition to a brokerage. Holding shares in Robinhood itself may mean holding some crypto, which is not the case with typical brokerage firms.
Taxation of NFTs
NFTs are likely to be taxed as collectibles at a 28% rate, as mentioned in other articles. However, no official IRS guidance on this has been released yet.
Loss of Access to Digital Wallet
If a client loses the key to their digital wallet, they cannot claim a deduction on Form 8949. However, it may be possible to claim the loss as abandoned property on Form 4797, but consulting a tax attorney is recommended. Please note that the theft and loss deduction has been removed under the TCJA.
Staking Income
On July 31, 2023, the IRS released Revenue Ruling 2023-14, which concludes that the fair market value of staking rewards received by a cash-method taxpayer is includible in the taxpayer’s gross income for the tax year in which the taxpayer gains "dominion and control" over the staking rewards.
The Taxation of Cryptoassets in the UK
As a general rule, individuals will be liable for Capital Gains Tax (CGT) when disposing of cryptoassets, just as they would for any other asset held for personal investment. Tax may also be due at ordinary income tax rates if an individual is running a business that deals in the trading of cryptoassets. National Insurance would also apply in this case.
When tokens are awarded for verifying additions to the blockchain ledger (mining), these are considered income taxable at regular income tax rates. Similarly, any tokens received through staking or airdrops where a service has been performed are subject to income tax. If no service has been performed, income tax may not apply, but this will be determined on a case-by-case basis, depending on the facts and circumstances.
It’s also important to note that HMRC views different cryptocurrencies as separate assets. For example, exchanging Bitcoin for Ethereum triggers a taxable event upon closing the position on Bitcoin. Similarly, using cryptocurrency to purchase goods or services is considered a taxable event, as the cryptocurrency is effectively exchanged for the cash value of the purchased item.
Taxpayers should be particularly cautious if they expect to realize capital gains (crypto and non-crypto) exceeding the Annual Exemption Allowance (currently £3,000). The high-volume nature of cryptocurrency trading often results in numerous reportable transactions, which can lead to increased compliance fees.
Things to consider for US citizens resident in the UK
- HMRC Updated Guidance (November 2021): HMRC has clarified that the residence of the beneficial owner of an exchange token (such as Bitcoin) determines the source of the asset for tax purposes. This means US citizens residing in the UK who hold crypto assets in a non-UK brokerage account may still be required to report income and realized gains, even if they are claiming the remittance basis of taxation.
- Volatility and Foreign Tax Credits: Due to the volatility of cryptocurrency markets, US taxpayers using foreign tax credits should be extra cautious when calculating necessary tax prepayments to ensure full credit availability when filing their US tax return. Failure to properly manage this can result in paying both full US and UK taxes on the same gains before being able to claim a refund of US taxes paid.
- High-Volume, Short-Term Transactions: Crypto investments often involve high-volume, short-term transactions. US taxpayers may end up owing most of their tax at higher ordinary income tax rates instead of long-term capital gains rates, unless their crypto portfolio is managed with tax efficiency in mind. If this is a concern, consulting with a financial advisor is advisable.
The tax treatment of cryptocurrencies is a complex and developing topic. Much of the current advice from professional tax preparers is based on guidance notes rather than applicable legislation. We recommend that all taxpayers obtain professional advice before investing in any cryptoassets.
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