Did you know that if you bought cryptocurrency the last year, you could be in for a surprise this tax season?
Surprise, surprise! Your cryptocurrency holdings, including Bitcoin, Ethereum, and others, are taxable assets according to the IRS. For tax reasons, the IRS considers cryptocurrency holdings to be “property”, meaning your cryptocurrency is taxable in the same manner as any other assets you own, such as stocks or gold.
The deadline to submit your 2021 crypto tax or ask for an extension was April 18. If you sought an extension, you have until October 17, 2022, to deliver your paperwork.
2021 was a banner year for cryptocurrency, including many new investors entering the market for the first time. According to a recent Grayscale Investments report, more than half of existing Bitcoin investors made investments in the previous 12 months. Throughout the year, the cryptocurrency market experienced many all-time highs and lows, resulting in significant gains and losses for many investors.
Most taxpayers who buy and sell cryptocurrencies on online exchanges find it to be rather straightforward to account for them in their tax returns. However, like with most things linked to digital money, the more involved you are, the more difficult things become.
Here’s what you need to know about which activities you may need to disclose to the IRS and how you can start planning your taxes.
When Should You Report Cryptocurrency Transactions On Your Tax Return?
When you utilize cryptocurrency as a means of exchange, things start to become taxed. This includes exchanging your cryptocurrencies for US dollars, buying another cryptocurrency using Bitcoin, such as Ethereum, or using Bitcoin to purchase goods and services.
NFT Trading Or Minting
A non-fungible token, or NFT, is a blockchain token that confirms you are the only owner of a one-of-a-kind digital object, such as a digital sports collectible or an animated winged cat with a Pop-Tart body. NFTs may be purchased and sold on digital markets such as OpenSea and SuperRare.
And, like cryptocurrency, they are taxed. However, because the IRS has not issued any explicit tax guidance on NFTs, it can be difficult to manage. According to a crypto tax software startup, the particular tax consequences of a given NFT rely on two factors: whether you’re an NFT creator or investor, and how much you engage with NFTs (i.e. as a hobby or a business).
When Will You Owe Cryptocurrency Taxes?
Because virtual currencies are considered property by the IRS, their taxed value is determined by capital gains or losses. In other words, how much value your assets acquired or lost in a particular time.
The difference between the cost you paid when you purchased or got the cryptocurrency (its cost basis) and the sum you make when you sell it is your capital gain or loss, which you will have to report on your tax return. In general, if you purchased $100 worth of Bitcoin and then resold it for $500, you’d make $400 in capital gain. You would sustain a capital loss in the event that the worth of your Bitcoin decreased during that time. You can subtract up to $3,000 from your tax liability if your loss exceeds your gains.
Reporting Cryptocurrency Income
Some people get paid virtual money for their services. This might involve getting cryptocurrency as income rather than cash, earning Bitcoin by mining cryptocurrency, or earning coins or tokens as a reward for particular behaviors. Whatever method you use, you must record the value of the cryptocurrency in US dollars when it is received and declare that earnings on your tax return.
Keep Track Of Your Activities
One of the most essential things to remember when getting started with cryptocurrencies is that it is your obligation to maintain track of any potentially taxable transactions, as well as the market value of your cryptocurrency during those operations.
The IRS only provides basic instructions on the documents you’ll need to preserve for tax reporting reasons, stating that they should be adequate to demonstrate the positions taken on tax returns. Regular monitoring about when you obtain, trade, or swap virtual currency, as well as the current market price of your cryptocurrency, are just a few examples the agency gives.
How To Prepare For Tax Season If You Own Crypto
Start planning ahead of time if you want to streamline your crypto-related tax file. Even if that’s how you usually approach tax season, don’t wait until the last minute to start compiling your paperwork and calculating what you owe.
If you’re just getting started with Bitcoin or another cryptocurrency and have only a few transactions, you may be able to quickly record your crypto profits yourself using standard tax software.
To Sum Up
We hope this guide helped you better understand crypto taxes. Even if you aren’t engaging in intricate crypto activities and just have concerns about your tax obligation or aren’t sure whether you’re reporting appropriately, consult with a tax expert who has experience reading tax legislation relating to virtual currencies.