IRS Changes Tax Requirements; Purchasing Crypto with Fiat (USD) Doesn’t Need to be Reported
If a person has purchased cryptocurrencies with USD, such a transaction is not reportable to the Internal Revenue Service (IRS), clarifies the updated FAQ on Virtual Currency Transactions on the official website.
If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question, which wants to know about your crypto activity.
This update by the IRS provides clarity to taxpayers who were unsure whether purchasing crypto in USD requires them to report it.
However, this only applies to real currency, that is, fiat, and not purchasing crypto with other cryptocurrencies as that is a taxable event.
Virtual currencies are treated as property under the IRS. If you hold the cryptocurrency for one year or less before selling or exchanging it, you will have a short-term capital gain or loss, and for more than one year, it counts as long-term capital gain or loss. The period for the same starts on the day after you acquired the virtual currency.
The IRS also considers airdrops, which results in you receiving a new cryptocurrency, a taxable event. Income from airdrops is calculated by the fair market value of the new cryptocurrency.
Virtual currency received as a bona fide gift is not recognized as income until sold, exchanged, or otherwise disposed of. Additionally, donating cryptocurrency to a charitable organization is not taxable as it is treated as a non-cash contribution.