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Yes, crypto transactions are taxable events. All the income and capital gains have to be reported for the IRS and included in tax calculations.
The IRS tax code makes no distinction between the marketplaces where the crypto transaction takes place. So regardless of the transaction marketplace; DEX, CEX or person to person, crypto transactions are taxable events.
IRS declared that crypto, termed as “Virtual Currency”, for the purposes of taxation is treated as property. So all the tax laws and regulations that apply to properties are applicable to crypto currencies as well. Here is the relevant news release by the IRS.
Broadly speaking income and capital gains are taxed. If you receive any crypto as salary, airdrop, incentives etc., they are categorized as income. And gains that you make through trading and transactional activities are categorized as capital gains.
You can read about the IRS news release here.
Form 8949 is used to report sale and other dispositions of capital assets. Since crypto is treated as a property any sale of crypto assets is considered as disposition of assets and hence need to be reported. You can read more about Form 8949 on the IRS website.
Sale of crypto assets is considered as disposition of assets. When you convert one crypto to another crypto you are selling a crypto in exchange for another crypto asset and hence you need to report the crypto that you sold. For example; suppose you swapped out 12 ETH for 0.5 BTC. You are selling 12 ETH and hence it needs to be reported.
No, there are no tax breaks or incentives for holding cryptocurrencies.
You report crypto transactions and earnings by filing 1099-MISC. It is typically sent by your exchange whenever you earn more than $600 of income through staking, lending interest, referral bonus and so on. You can read more about 1099-MISC here. However, it does not include capital gains. You need to file capital gains through Form-8949. You can read more about it here.
Airdrops, and forks are taxed as income. Airdrops, which is the distribution of a cryptocurrency to existing holders of another cryptocurrency, and forks, which is the creation of a new cryptocurrency from an existing one, are taxed as income. The fair market value of the airdropped or forked coins at the time of receipt is considered to be the income.
No. Crypto currency is not a legal tender in the US, and hence can not be used to pay your taxes.
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