Cryptocurrency and Taxes latest explanation

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You may be in for a harsh revelation this tax season if you bought in cryptocurrency last year, now let’s get to the full gist on Cryptocurrency and Taxes latest explanation 2022

Yes, you must pay taxes on your Bitcoin, Ethereum, and other cryptocurrencies. For tax reasons, the IRS considers cryptocurrency holdings to be “property,” which means your virtual currency is taxed similarly to any other assets you own, such as stocks or gold. And tax season is just around the corner – on January 24, 2022, to be exact.

 

The year 2021 was a watershed moment for cryptocurrency, with a slew of new investors flocking to the market for the first time. According to a recent analysis by Grayscale Investments, more than half of existing Bitcoin investors started investing in the last 12 months. Throughout the year, the crypto market achieved many all-time highs and lows, resulting in big gains and losses for many investors.

 

“Crypto accomplished some interesting things in 2021, and there are a lot of people who have come into crypto in the last 12 to 24 months, so it might be their first time paying crypto taxes,” explains Laura Walter, CPA and creator of Crypto Tax Girl.

Accounting for cryptocurrency in your tax return is pretty simple for most people who buy and trade it on internet exchanges. However, like with most things linked to digital currency, things can become a lot more convoluted as you become more involved.

Here’s everything you need to know about which activities you may be required to record to the IRS, as well as how to start planning for your 2021 taxes.

 

When Should You Declare Cryptocurrency Transactions on Your Tax Return?

Purchasing Crypto With Dollars

Buying virtual currency with US dollars and retaining it in the exchange or transferring it to your personal wallet does not guarantee you’ll owe taxes on it at the end of the year.

 

According to IRS instructions on your Form 1040 tax return, if your only crypto-related action this year was purchasing a virtual currency with US dollars, you don’t have to report it to the IRS.

 

Cryptocurrency Trading

When you utilize crypto as a medium of trade, things start to become taxed. This can include selling your cryptocurrency for US dollars, swapping one cryptocurrency for another — such as buying Ethereum with Bitcoin — or using bitcoin to pay for products and services.

Picture of woman hand with calculator and papers Premium Photo
making proper calculation

A taxable transaction occurs when an investment is sold or exchanged for another investment, according to Daniel Johnson, a financial advisor and founder of RE|Focus Financial Planning in Asheville, North Carolina. “If you do a lot of trading, you have to be careful.” Every time you trade in and out of different sorts of cryptocurrencies, it’s a taxable event.”

 

According to Walter, the IRS is taking a closer look at bitcoin transactions this year and cracking down on anyone evading taxes. If you’ve managed to dodge it,

“Now that the IRS is requiring additional tax forms and reporting, I’m expecting more audits,” Walter adds.

 

Buying, selling, or minting NFTs

A non-fungible token, or NFT, is a blockchain-based token that verifies you are the sole owner of a one-of-a-kind digital item, such as a digital sports collectible or an animated flying cat with a Pop-Tart body. NFTs can be purchased and sold on digital marketplaces such as OpenSea and SuperRare.

They’re also taxed, just like crypto.

However, because the IRS has yet to issue detailed tax guidelines on NFTs, it can be difficult to manage. The particular tax implications of a given NFT rely on two factors, according to Shehan Chandrasekera, CPA and head of tax strategy at CoinTracker.io, a crypto tax software company: whether you’re an NFT developer or investor, and how much you engage with NFTs (i.e. as a hobby or a business).

It’s critical to understand what events are taxable and how they’re taxed if you’re creating or minting NFTs. Paying petrol fees to mint an NFT, for example, is a taxable event. Assume you want to produce NFTs for fun and invest 0.1 Ethereum to do so.

If you bought this Ethereum for $100 and it’s now worth $300 at the time you minted the NFT, you’ll have made a $200 profit on the deal. Depending on how long you kept the Ethereum before using it to mint the NFT, you’d be subject to either a long-term or a short-term capital gains tax rate.

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The $100, on the other hand, would be classified as ordinary income if you were a professional creator who frequently minted NFTs for your business.

“If you’re a hobbyist, you have to disclose your income but you can’t deduct any business costs,” Chandrasekera explains. “You can deduct business-related expenses if you’re making NFTs as a business.”

Another taxable event occurs when you sell the NFT for crypto or exchange it for another NFT. Because you are earning (or losing) money by selling the NFT you produced, it would be taxed as income. Any royalties you receive as a result of an NFT you generated will be taxed as income.

Taxes for NFT investors work in a similar way to how they do for crypto traders. For tax purposes, most art-based NFTs are regarded as collectibles, making them subject to capital gains taxes like other common cryptocurrencies.

When you buy or sell an NFT with a cryptocurrency like Ethereum, you’ll have to pay capital gains taxes. The amount you owe will be determined by the length of time you owned the NFT and if you profited. According to Chandrasekera, you can deduct NFT losses from your taxes.

“If the value of your Ethereum has dropped at the time you’re buying an NFT, you can claim a loss,” he explains.

If you’ve previously reported your cryptocurrency on your taxes, she warns that this year “may not be the year you’ll get away with it.”

“Now that the IRS is requiring additional tax forms and reporting, I’m expecting more audits,” Walter adds.

 

Buying, selling, or minting NFTs

A non-fungible token, or NFT, is a blockchain-based token that verifies you are the sole owner of a one-of-a-kind digital item, such as a digital sports collectible or an animated flying cat with a Pop-Tart body. NFTs can be purchased and sold on digital marketplaces such as OpenSea and SuperRare.

 

They’re also taxed, just like crypto.

However, because the IRS has yet to issue detailed tax guidelines on NFTs, it can be difficult to manage. The particular tax implications of a given NFT rely on two factors, according to Shehan Chandrasekera, CPA and head of tax strategy at CoinTracker.io, a crypto tax software company: whether you’re an NFT developer or investor, and how much you engage with NFTs (i.e. as a hobby or a business).

 

It’s critical to understand what events are taxable and how they’re taxed if you’re creating or minting NFTs. Paying petrol fees to mint an NFT, for example, is a taxable event. Assume you want to produce NFTs for fun and invest 0.1 Ethereum to do so.

If you bought this Ethereum for $100 and it’s now worth $300 at the time you minted the NFT, you’ll have made a $200 profit on the deal. Depending on how long you kept the Ethereum before using it to mint the NFT,

you’d be subject to either a long-term or a short-term capital gains tax rate. The $100, on the other hand, would be classified as ordinary income if you were a professional creator who frequently minted NFTs for your business.

 

“If you’re a hobbyist, you have to disclose your income but you can’t deduct any business costs,” Chandrasekera explains. “You can deduct business-related expenses if you’re making NFTs as a business.”

 

Another taxable event occurs when you sell the NFT for crypto or exchange it for another NFT. Because you are earning (or losing) money by selling the NFT you produced, it would be taxed as income. Any royalties you receive as a result of an NFT you generated will be taxed as income.

 

Taxes for NFT investors work in a similar way to how they do for crypto traders. For tax purposes, most art-based NFTs are regarded as collectibles, making them subject to capital gains taxes like other common cryptocurrencies.

When you buy or sell an NFT with a cryptocurrency like Ethereum, you’ll have to pay capital gains taxes. The amount you owe will be determined by the length of time you owned the NFT and if you profited.

According to Chandrasekera, you can deduct NFT losses from your taxes.

“If the value of your Ethereum has decreased at the time you’re buying an NFT, you can claim a loss,” he argues.

When Will You Have to Pay Cryptocurrency Taxes?

Because virtual currencies are considered property by the IRS, their taxable value is determined by capital gains or losses – in other words, how much value your assets gained or lost over time.

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“When you trade cryptocurrencies or use bitcoin to buy something, you’re paying capital gains taxes because you’re using a capital asset to get something or get

another asset,” explains Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker.io, a crypto tax software firm.

 

The capital gain or loss — what you’ll declare on your tax return — is the difference between the amount you spent when you bought or got the cryptocurrency (its cost basis) and the amount you earn when you sell it. In general, if you bought $100 worth of Bitcoin and sold it for $500, you’d make a $400 profit. If the value of your Bitcoin dropped during that time, you’d suffer a capital loss. You can deduct up to $3,000 from your taxable income if your losses exceed your gains (for individual filers).

 

The length of time you’ve had the cryptocurrency is also a factor. A long-term capital gain would be considered if you held onto a unit of Bitcoin for more than a year.

It’s a short-term gain if you acquired and sold it inside a year. These distinctions may have an impact on the tax rate that is applied. The tax rate varies depending on your total taxable income, and you can only deduct a certain amount in capital losses if your crypto asset loses value.

According to the federal income tax levels for 2022, short-term capital gains are taxed like ordinary income.

You can reconcile your capital gains and losses on Form 8949 and then report them on Schedule D of your Form 1040 tax return. You can use the same form to report NFT minting gains or losses, as well as NFT transactions, if you’re an NFT investor or enthusiast. Simply put “C” in column (f) to indicate that you sold an NFT, which is considered a collectible. Additional information and tools are available on the IRS website to assist you in determining your crypto-related tax burden and reporting it.

Reporting Cryptocurrency Profits

Some people get paid in virtual currency for their services. This could involve receiving cryptocurrency instead of cash as a source of income, earning Bitcoin by mining new coins, or receiving coins or tokens as a reward for particular behaviors (like as Coinbase’s Earn rewards program). You must record the value of the crypto in US dollars when it is received, regardless of how it was acquired, and report that income on your tax return.

Pat White, co-founder and CEO of Bitwave, a startup that assists businesses with crypto tax reporting, says, “If I get paid one Bitcoin for services, I have to grab the fair market value for that Bitcoin at the time I receive it.” “Right now, if Bitcoin is worth $54,000, I’m required to report $54,000 in personal income.”

“A taxpayer who receives virtual currency as payment for goods or services must include the fair market value of the virtual currency, measured in US dollars, as of the date the virtual currency was received, in computing gross income,” the IRS says.

That fair market value you capture becomes the cost basis for that coin, which you must keep track of. So, if you utilize crypto you’ve earned to buy something, you’ll have to reconcile its cost base with its value when you use it to buy products or services.
Additional information on reporting virtual currency income in more specific instances can be found on this IRS webpage.

Keep an eye on your progress.
One of the most important things to keep in mind as you begin dealing in cryptocurrencies is that it is your responsibility to maintain track of any potentially taxable activities, as well as the fair market value of your bitcoin during those operations.

The IRS only provides broad guidelines for the data you’ll need to preserve for tax reporting: they should be enough “to establish the positions taken on tax returns.” Records of any time you receive, sell, or trade virtual currency, as well as the fair market value of your virtual currency, are some of the examples given by the agency.

White says, “That is the huge, scary issue.” “But actually tracking the cost basis and making sure you’re doing it correctly, that’s where it gets really tough,” he says.

Some exchanges may send you a Form 1099-B to help you figure out your profits and losses, although this is rare. Finally, you’re in charge of keeping track of your taxable activities and the fair market value of your currency.

That won’t be the case for the 2023 tax year, according to projections. Brokers — called bitcoin exchanges — are required to send a 1099-B under a clause of the $1.2 trillion bipartisan infrastructure plan signed into law by President Biden last November. In other words, crypto exchanges will be compelled to report crypto transactions to the IRS immediately.

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“Don’t expect a tax form from cryptocurrency exchanges this year,” Shehan says. “The law for 1099-B forms is for the tax year 2023. You will not receive a 1099-B for the tax years 2021 and 2022.”

It’s usually simple to track or generate information about your transactions if you keep your virtual currency in your account on the exchange where you bought it. However, if you move your cryptocurrency between private wallets or have it in numerous locations, you’ll need to be more cautious about keeping track of it.

You can use crypto-focused tax software applications to make the procedure easier. The software will create the cost basis for your trades and assist you determine your capital gains and losses if you input data on all of your crypto trades or earnings across all exchanges you’ve used. CoinTracker, TokenTax, CryptoTrader.Tax.

and others are compatible with traditional tax software like TurboTax or TaxAct, allowing you to quickly import the gains and losses they report to your tax return.

  • When You Have Crypto, How Do You Prepare for Tax Season?
  • Start planning ahead now to make your crypto-related 2021 tax file as simple as possible. Even if that’s how you usually
  • approach tax season, don’t wait until April 1, 2022, to start compiling your records and calculating out what you owe.

“You don’t want to be attempting to catch up on a year’s worth of crypto activity in April,” White warns. “You actually want to treat it more like a business, where you make sure all of your taxes are up to date, that you’re recording things appropriately, and that you’re more proactive about it on a regular basis.”

If you’re just getting started with Bitcoin or another cryptocurrency and only have a few transactions (with proper cost basis reporting), you might be able to declare your crypto earnings using your standard tax software.

“Most folks are really straightforward: they have a W-2, a few of 1099 interest forms, and possibly some crypto,” Chandrasekera explains. “Those people don’t actually require the services of a CPA.” However, if you’re dealing with substantial sums of money, such as DeFi transactions, staking, or mining activities, you’ll want to sit down with a CPA and discuss tax planning and tax-saving measures.”

Consider enlisting the help of a professional.

Consider working with a tax professional who has experience reading tax code connected to virtual currencies, even if you aren’t doing intricate crypto operations and only have questions about your individual tax liability or aren’t sure if you’re reporting appropriately.

The IRS and other agencies are unable to provide guidance on every situation that a taxpayer may face, and there are several gaps in present guidance. That’s why, according to Chandrasekera, it’s critical to hire a tax professional who is up to date on IRS regulations and has experience reporting bitcoin earnings and losses. Ask potential tax advisors if they possess any virtual currency and if they are aware of the tax code’s uncertainties.

“There are some gray areas,” Chandrasekera adds, “and that’s where CPAs step in and say, ‘OK, we don’t have clear guidance from the IRS, but this was the idea when they set up the guidance.” “As CPAs, we should be able to adapt our experience and general knowledge of the tax code to the individual instances that we see.”

Virtual Currencies: IRS Guidance
The IRS has published the following instructions on virtual currency and tax reporting so far:

Cryptocurrencies are a type of virtual currency
Questions about virtual currency transfers that are frequently asked
Notice 2014-21 from the IRS: How do current tax laws relate to virtual currency transactions?

Long-Term Capital Gains Tax Rates in 2022

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