The world of cryptocurrency is exciting, but when tax season rolls around, it can become an arduous task, especially in the U.S. As digital assets evolve to mainstream finance, American regulators have stepped up their oversight. Today, four key agencies oversee different aspects of the crypto space, such as the IRS, SEC, CFTC, and FinCEN, playing a pivotal role in regulating the digital assets for investors, traders, and developers. This article will bring you insights on how crypto is taxed, regulated, and reported in the U.S., with clear explanations and practical tips for staying compliant.
Table of contents
How the IRS Handle?
Since 2014, the Internal Revenue Service (IRS) has treated cryptocurrencies like Bitcoin, Ethereum, and Solana as property rather than currency. This means that any time you sell, trade, or use crypto, it can trigger capital gains or income tax.
Capital Gains Tax
When you sell or exchange crypto, you must calculate the difference between your sale price and purchase cost (called the cost basis). Under the short term gains, that are held for a year, the digital assets are taxed as ordinary income which is about 10% to 37%. Whereas in the long-term gains, that are also held for a year, favourable rates can be gained such as 0%, 15% or even 20%, which can significantly reduce your tax burden.
For example, lower-income individuals may pay no tax on long-term gains, while high earners may face the 20% rate. This structure incentivizes long-term holding and strategic planning, making it crucial for crypto investors to track holding periods and tax brackets to optimize their returns and remain compliant with IRS regulations.
Crypto as Income Tax
If you earn crypto through mining, staking, airdrops, or payment, it is treated as ordinary income based on its fair market value on the day received. However, buying and holding crypto, transferring the asset between one’s own wallet, or using crypto as collateral is not taxable as they don’t give any income. However, if crypto is disposed, users must maintain detailed records of all transactions, including timestamps, amounts, and fair market values, to accurately calculate any potential tax obligations and ensure compliance with U.S. tax laws.
How to Calculate and Report Crypto Taxes
Crypto taxes depend on when the asset was acquired, used, and when it was sold, thus calculating its cost basis and holding time. In order to calculate, you need to record the purchase date, amount, and cost of each crypto asset and then its sale or usage date, amount and fair market value. By subtracting the cost from sale price, it can be determined as capital loss or profit and later categorized as short-term or long-term depending on its holding period.
How Does the SEC Handle?
The U.S. Securities and Exchange Commission (SEC) monitors crypto projects to ensure investor protection. and regulate securities markets. The agency applies the Howey Test on cryptocurrencies and tokens to determine if they are securities or not. Assets that can most likely be considered as securities are tokens from ICOs, governance tokens, security tokens, and even some DeFi tokens.
Over the years since its inception, the SEC had been stringent against offering or facilitating the sale of unregistered securities and the legal battle against Ripple is a strong proof. On a quick note, if an asset is promoted as an investment, it would come under the SEC regulations.
How Does the CFTC Handle?
The Commodity Futures Trading Commission (CFTC) considers major cryptocurrencies like Bitcoin and Ethereum to be commodities, similar to oil or gold. The agency doesn’t regulate spot markets (i.e., buying/selling crypto directly), it enforces regulations on fraud and manipulation in both futures and spot markets when they affect derivatives.
How Does the FinCEN Handle?
The Financial Crimes Enforcement Network (FinCEN) handles crypto regulations by ensuring compliance with Anti-Money Laundering (AML) and Know-Your-Customer (KYC) laws, thus preventing suspicious activities, including terrorist financing. Apart from that, it mandates the reporting of Currency Transaction Reports (CTRs) for transactions beyond $10,000 and Suspicious Activity Reports (SARs) for potentially illicit activities. Moreover, it enforces the Travel Rule for transactions beyond $3,000 to enhance transparency and traceability. In the future, there are chances for FinCEN to expand its control to non-custodial platforms.
What is the Role of the Federal Reserve Here?
While the Federal Reserve does not directly enforce crypto tax laws, it plays a pivotal role in shaping the broader financial framework that governs digital assets. Moreover, it is responsible for maintaining monetary stability, managing inflation, and overseeing the safety of the financial system, all of which intersect with the crypto ecosystem. As digital assets grow in popularity, the Fed evaluates how they might impact banking operations, capital flows, and even the efficacy of monetary policy. Further, its actions also directly influence crypto markets, which has been witnessed by market observers whenever Fed Chair Jerome Powell and President Donald Trump meet.
Conclusion
As crypto solidifies its role in the global financial system, tax regulation becomes the backbone of legitimacy and investor confidence. With clear and transparent rules, the U.S. financial system is protected not only from frauds and abuse but also paves the way for institutional growth, innovation, and long-term adoption. Individuals and investors, complying with tax regulations is not only a legal obligation, but a strategic move towards securing a sustainable future in the cryptocurrency ecosystem.
Disclaimer: The information presented in this article is for informational and educational purposes only. The article does not constitute financial advice or advice of any kind. Coin Edition is not responsible for any losses incurred as a result of the utilization of content, products, or services mentioned. Readers are advised to exercise caution before taking any action related to the company.
