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Tax Day is almost here in America, April 18, and if you haven’t filed your taxes yet, you may be wondering if the government will get a cut of the taxes. Bitcoin you bought several months ago. The I.R.S. it mostly treats cryptocurrency as property, which means you may need to pay taxes on your holdings. But there is a lot of fine print, and it is important to review all of it, because the agency has intensified its application to catch tax evaders. “This is an area that the IRS is looking very hard to audit, because I think they see it as a big revenue collector,” says Taylor Weinstein, general counsel at Pryor Cashman LLP, where she is a member of the tax and investment management groups. of the company. . “It’s important to keep records as detailed as possible.”
Of course, an accountant could help you sort it all out, as could one of the many crypto tax software packages that have emerged in recent years. But to get you started, here’s a brief introduction on how to declare your digital assets.
I bought crypto with cash in 2021. Do I have to pay taxes on it?
If you only bought crypto instead of selling it, then you are clean. The IRS only gets interested after you take some kind of action on the cryptocurrencies you bought. Bitcoin that is only in your Coinbase account or Metamask wallet, no matter how much it appreciates, is tax-free.
If I purchased cryptocurrency, how should I answer the “virtual currency” question on the first page of my tax return?
On the first page of 2022 tax returns, the IRS has pointed to the importance of cryptocurrencies by asking, “At any time during 2021, did you receive, sell, trade, or dispose of any virtual currency?”
If you simply bought crypto with fiat currency and did not take any further action on it (other than moving it to another crypto wallet), then you can safely choose “no”. If you did anything else, including buying NFTs or a product online, staking your crypto, or converting it back to cash, then you should choose “yes”.
If I bought and then sold cryptocurrencies, how much tax do I have to pay?
The IRS treats the sale of cryptocurrencies like the sale of stocks, which requires you to report your capital gain or loss. If you bought $500 worth of Bitcoin and then sold it for $800, for example, you would need to report a capital gain of $300.
How that $300 profit is taxed depends on how long you’ve had your Bitcoin. If you bought it more than a year before you sold it, you’ll pay a lower rate (based on long-term capital gains rates). If you bought it within the year, you may have a tax rate of up to 37%, depending on how much you made from the sale.
Every time you sell cryptocurrency it is considered a separate taxable event that you will need to keep track of. Some crypto exchanges have started issuing a tax form called 1099-K for your most active merchants (ie those who have exceeded $20,000 in gross payouts and 200 separate 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 they’re served to the recipient,” Weinstein says. “It will be the IRS’s weapon in finding taxable crypto transactions.”
But even that form is incomplete in terms of the information the IRS wants from you. It is important to keep track of each transaction and enter them into the IRS Form 8949 to reconcile your capital gains and losses. All of that information should be reported on your Form 1040 tax return using Programmed.
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What happens if I sold cryptocurrencies at a loss?
Don’t panic: You can offset up to $3,000 of your taxable income each year. Any excess losses beyond that can be carried over to future tax years, as an offset from future profits.
What happens if I exchange one cryptocurrency for another?
That is a taxable event. If he bought Ethereum for $500, saw it appreciate to $1000, and then sold it for Solana, he would report a $500 capital gain on which he would have to pay taxes.
What if I mined cryptocurrency or was paid for goods or services through cryptocurrency?
Each of these is considered taxable income, which must be reported on your tax return on Schedule 1, as “Other Income.” The value you must report is from the day and time you obtained the cryptocurrency (as opposed to the day you filed taxes). this IRS The FAQs have additional information on how to report virtual currency earnings in more specific cases.
Sorry, these count as taxable events. You will need to report each transaction, as if you were selling stock. For this reason, it is very important to keep track of all the cryptocurrencies that come out of your wallet and the type of currency that you are using. You can search for your own blockchain transactions through websites like etherscan Y blockchain.com/explorer.
I am an NFT creator. What parts of my activity are subject to tax?
While the IRS has not released any specific tax guidance on NFTs, experts agree that most transactions involving NFTs are taxable if they involve crypto. If an artist mints an NFT, for example, she has a capital gain or loss on the crypto she traded in the minting process. Likewise, they would also have to pay capital gains tax when that NFT is sold.
If you’re a professional NFT creator, you can deduct certain business expenses, just like you would with any other type of business.
What happens if I bought and sold NFTs as an investor?
Every transaction purchased with cryptocurrencies, including NFTs, is subject to capital gains tax. The same rules apply as before: the amount you owe depends on how long you held the NFT and whether you made a profit. You can claim NFT losses on your taxes.
One issue the IRS hasn’t resolved is whether they consider NFTs to be “collectibles,” which are a separate category of assets under the tax code. For now, Weinstein says that classifying his NFTs as collectibles “seems like that would be the right approach.”
How about paying for things with stablecoins?
Because stablecoins rarely fluctuate in value, since many of them are pegged to the US dollar, you’re much less likely to make a capital gain or loss when using them. However, using stablecoins to pay for things is still considered a taxable event that you need to report.
What did I give to charity through crypto?
You can claim a deduction if you itemize correctly (for the value of crypto at the time and date of contribution). In this case, you do not have to pay capital gains tax.
What happens if I don’t comply?
The IRS will be watching you, especially if you are an active trader. The agency has subpoenaed centralized crypto exchanges for information on non-compliant US taxpayers. In 2021, they issued John Doe subpoenas to cryptocurrency exchange operators kraken Y Circle to locate people who exchanged $20,000 or more in crypto between 2016 and 2020.
I need help
Many crypto tax software solutions have been created to make this process easier; include Coin Tracking, token tax, CryptoTrader.Taxes. Many of those sites are also compatible with regular tax programs like TurboTax or TaxAct. Alternatively, there is a growing number of CPAs that specialize in cryptocurrencies.
The bottom line
If you actively traded cryptocurrencies and/or NFTs in 2021, you will have to pay the taxman the same way you would if you were trading stocks. If you lost money in cryptocurrencies due to price fluctuation, you can deduct up to $3,000 in capital losses. The IRS has shown great interest in this space and will likely continue to make rules as the space develops. So don’t think of this year’s aggressiveness as a blip, but as the new normal.
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