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Cryptocurrency Tax: A Guide to Tax Rules for Bitcoin, Ethereum and More
With the surprising rise and fall of some cryptocurrencies such as Bitcoin and Ethereum, cryptocurrency traders may have serious tax questions on their minds. The Internal Merchandise Service (IRS) is speeding up enforcement efforts, and even those who hold currency — let alone trade it — will have to make sure they’re not stepping above the law.
It might be easier to do than you think, given how the IRS treats cryptocurrencies.
“This is really a huge enforcement area for the IRS right now,” Brian R. says. Harris, Tax Attorney at Fogerty Mueller Harris, PLC in Tampa. “They’re creating a lot of publicity going after people who own, trade or use cryptocurrencies.”. “They could be the target of audit or verification of compliance.”
While Bitcoin’s one selling point, for example, has remained anonymity (or at least a nickname), authorities have been playing catchup with some success in recent years.
8 important things to know about crypto tax:
1. You will be asked if you own or use a crypto currency
Your 2022 tax return will require you to tell us if you have transacted in cryptocurrency. In a clear spot near the top, Form 1040 asks, “Anytime during 2022, shall you receive, sell, send, exchange or receive, any financial interest in any virtual currency, or otherwise.” Need of what? ”
So you’re definitely on the hook to answer whether you’ve transacted in cryptocurrency, and you’re likely in a position to lie to the IRS. If you don’t answer honestly, you could be in further legal danger, and the IRS has no mercy on liars and tax fraud.
However, there is a margin. In explanation, the IRS said taxpayers who bought virtual currency with only real currency were not obligated to answer the “yes” question.
2. You can’t avoid filing taxes just because you didn’t get 1099
With a bank or brokerage, you (and the IRS) usually get a Form 1099 that reports income you receive during the year. However, this may not be the case of cryptocurrencies.
“Compared to specific 1099 forms for stocks, interest and other payments, there’s not yet the same level of reporting for cryptocurrency,” Harris says. “The IRS doesn’t get major reporting from Coinbase and other exchanges.”
However, under the November 2021 law, maximum tax reporting will be required for those involved in the industry starting January 1, 2023. The law requires brokers – including disputed, anyone who transfers digital assets to someone else – to report that information to the IRS in the form of 1099 or similar.
Opponents say the law would require anyone who transfers cryptocurrencies, including miners and crypto wallets, to comply with new rules, including people who don’t have access to that information. However, lawmakers are already working on a new bill to more easily explain who the law applies to.
But a 1099 cut won’t allow you to avoid any tax liability, and you’ll still have to report your benefits and pay taxes on them. Still, it’s not all bad news: If you face a capital loss, you can deduct it on your return and reduce your taxable income.
3. Using crypto alone exposes you from a potential tax liability
You might think that if you only – use but don’t trade – cryptocurrency you’re not liable to taxes.
Not the truth!
Every time you exchange virtual currency for real currency, goods or services, you can create a tax liability. You create a liability if the price you get for your cryptocurrency – the price of a good or real currency you get exceeds the base of your cost in cryptocurrency. So if you get more value than you put in cryptocurrency, you get yourself liable for tax.
Sure, you can also get a tax cut, if the price of goods, services or real currency is lower than your cost base in cryptocurrency. In both cases, you need to know the basis of your cost to do accounting..
It is important to note that this is not a transaction tax. This is a capital tax – tax on the change in value of corrupt currency. And just like stocks you buy and hold, if you don’t exchange cryptocurrency for something else, you don’t realize any gains or losses.
4. The gain gained on crypto trading is seen as regular capital gains
So have you benefited from a profitable trade or purchase? The IRS generally treats gains on cryptocurrencies the same way it treats capital acquisition of any kind. That is, you’ll pay up to 37% in 2022. Your income (dependent on short-term capital gains, depending on your income (depends on short-term investment gains) for assets less than a year.
But for assets held for more than a year, you’ll pay long-term capital gains tax, possibly at lower rates (0, 15 and 20 percent). And the same rules apply to cryptocurrency in order to trap investment gains and losses against each other. So you can minimize capital losses and realize a net loss of up to $3,000 per year. If your net losses exceeds that amount, you’ll have to carry on to next year.
5. Crypto miners can be treated differently than others
Do you own cryptocurrency as a business? Then you will be able to reduce your expenses, as a normal business would. Your income is the price of your production.
“If you have a cryptocurrency mine, you realize revenue at fair market value, so that’s your basis in cryptocurrency,” Harris says. “Whether it’s trade or business, your expenses may be reduced.”
But here’s the key point: You have to own a trade or run a business to qualify. You can’t run your mining rig as a hobby and enjoy the deductions like a real business.
6. The gift of crypto is treated like any other gift
If you give someone corrupt currency, perhaps a younger relative as a way to gain interest, your gift will be treated the same way it would be. So it may be subject to gift tax if it exceeds $16,000 in 2022. And when it comes time to sell a gift for the recipient,
the cost base remains the same as the cost of the giver. She said, there are ways to avoid gift tax, even if you go overboard annually, like taking advantage of a lifetime discount.
7. Inherited cryptocurrencies are treated like other inherited assets
Inheritance cryptocurrencies are treated like second capital assets that pass down from one generation to another. If those states are slightly excessive, they may be subject to state taxes ($12.06 million in 2022).
Like stocks, cryptocurrencies have a fast cost basis for a reasonable price on the day of death. Cryptocurrency is treated for most people like common capital assets, says Harris.
8. The wash cell rule does not apply to cryptocurrency
While the IRS mostly treats cryptocurrencies as it would be capital assets, it takes an entirely different perspective when it comes to sales laundering. And it’s actually beneficial for crypto traders.
Usually, when a trader sells an asset and declares a loss, the trader should not purchase the asset (or very equivalent) within 30 days before or after the sale. If a trader repurchases an asset within that 30-day window, it is considered a wash sale.
So the loss can’t be claimed in writing unless the trader refrains from buying the asset within at least 30 day window. But the wash cell rule doesn’t exist for cryptocurrencies. So traders can sell their status, take a loss and then literally repurchase the assets later and still be eligible to claim a loss.
The rule is beneficial because it allows traders to seize the full cost of tax losses while still investing, efficiently, meaning that taking advantage of written tax amounts is itself a risk Yes.
But lawmakers are debating closing the gap, so it can’t be much longer.