Tax Day is almost upon America—April 18th—and if you haven’t filed your taxes yet, you might be wondering if the government will get a cut of the Bitcoin you bought several months ago. You might be subject to taxes on cryptocurrency that you own. But there’s a lot of fine print, and it’s important to wade through it all, because the agency has stepped up its enforcement to nail tax dodgers. “This is an area where the IRS is looking heavily to audit, because I think they see it as a high revenue raiser,” says Taylor Weinstein, counsel at Pryor Cashman LLP, where she is a member of the company’s tax and investment management groups. “It’s important to keep as detailed records as you can.”
An accountant or one of many new crypto tax software programs might be able help you. But to get you started, here’s a brief primer on how to declare your digital assets.
I purchased cryptocurrency with cash in 2021. What taxes do I need to pay?
If you only bought crypto as opposed to selling it, then you’re in the clear. The IRS only becomes interested after you take some sort of action upon the crypto you’ve bought. Bitcoin that’s just sitting in your Coinbase account or Metamask wallet, no matter how much it appreciates, is tax-free.
If I bought crypto, how should I answer the question about ‘virtual currency’ on the front page of my tax return?
On the very first page of 2022 tax returns, the IRS has signaled the importance of crypto by asking: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any virtual currency?”
If you simply bought crypto with fiat currency and took no later action upon it (other than moving it to another crypto wallet), then you can safely choose “no.” If you did anything else—including buying NFT or a product online, staking your crypto, or converting it back into cash—then you should choose “yes.”
How much tax would I be required to pay if I purchased and sold crypto?
Selling crypto is treated by the IRS as selling stock shares, so you must report your capital gain or loss. If you bought $500 worth of Bitcoin and then sold it for $800, for example, you’d need to report a $300 capital gain.
How that $300 gain is taxed depends on how long you’ve held your Bitcoin. If you bought it more than a year before selling it, you’ll pay a lower rate (according to long-term capital gains rates). You can get a tax rate up to 37% if you buy it in the first year. It all depends on how much money you make on it.
Every time you sell crypto is considered a separate taxable event that you’ll need to keep track of. For their most active traders, some crypto exchanges now issue a 1099-K tax form. if they have received more than $20,000 of gross payments, or have completed 200 transactions. “This is the IRS’s number one line of defense right now, because those 1099-Ks are filed with the IRS at the same time as they are delivered to the recipient,” Weinstein says. “It is going to be the IRS’s weapon in finding taxable crypto transactions.”
However, even this form does not contain all the necessary information the IRS needs. It’s important to keep track of every transaction, and enter them into IRS’s Form 8949 in order to reconcile your capital gains and losses. You should report all that information on your Schedule D Form 1040 Tax Return.
What happens if crypto is sold at a loss
Don’t panic: you can offset up to $3,000 of your taxable income each year. You can roll any excess losses forward into future years to offset future gains.
How would it work if one crypto was swapped for another?
That’s a taxable event. If you bought Ethereum for $500, watched it appreciate to $1000, and then sold it for Solana, you’d report a $500 capital gain that you’d have to pay taxes on.
What would happen if I were to mine crypto, or get paid via crypto for services or goods?
Each of those is considered taxable income, which should be reported on your tax return on Schedule 1, as “Other Income.” The value you must report is from the day and time you earned the cryptocurrency (as opposed to the day you filed the taxes). Additional information about reporting income from virtual currencies can be found in this IRS FAQ.
Sorry – these count as taxable events. You’ll need to report each transaction, just as if you were selling stocks. For this reason, it’s extra important to keep track of all the crypto leaving your wallet, and the type of currency you’re using. You can look up your own blockchain transactions via websites like Etherscan and blockchain.com/explorer.
I’m an NFT creator. Is there any part of my activity that is taxable
While the IRS hasn’t released any specific tax guidance on NFTs, experts agree that most transactions involving NFTs are taxable if they involve crypto. For example, an artist who mints an NFT would have to report a capital gain on any crypto they traded during the minting process. They would also have to pay capital gains taxes when the NFT is purchased.
If you’re a professional NFT creator, then you can deduct certain business expenses, just as you would for any other type of business.
How would it work if NFTs were bought and sold by an investor?
Capital gains tax is applicable to any transaction made with cryptocurrency. These rules are the same as ever: Your owe amount will depend on how long your NFT has been held, and whether or not you make a profit. Taxes allow you to claim NFT losses.
One aspect that the IRS has not resolved is whether they consider NFTs as “collectibles,” which are a separate category of asset under the tax code. For now, Weinstein says that to categorize your NFTs as collectibles “seems like that would be the right approach.”
You could also pay with stablecoins.
Because stablecoins rarely fluctuate in value—as many of them are pegged to the U.S. dollar—it’s far less likely you’d have a capital gain or loss when using them. However, the usage of stablecoins in order to purchase things is still a taxable event and you must report it.
What did I donate to charity using crypto?
If you properly itemize (for the cryptocurrency value at the date and time of your contribution), then you can claim a deduction. You don’t have to pay capital gains taxes in this instance.
What happens if I don’t comply?
The IRS will be watching you, especially if you’re an active trader. They have subpoenaed crypto exchanges centralized for details about U.S. taxpayers not complying. To locate those who exchanged crypto currency between 2016 and 2020, Kraken or Circle were issued John Doe summonses.
To ease the process, there are many options for crypto tax software, such as TokenTax or CoinTracker. Some of these sites also work with TaxAct or TurboTax. A growing number of CPAs are also available to specialize in cryptocurrency.
If you actively traded crypto and/or NFTs in 2021, you’ll have to pay the taxman in the same way that you would if you traded stocks. You can claim up to $3,000 for capital losses if you lose money trading crypto because of price fluctuations. It has demonstrated that it is interested in the crypto space, and will probably continue to make rules to help this area develop. So don’t think of this year’s aggressiveness as a blip, but rather the new normal.
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