By Abigail Perry
Crypto is still a relatively new investment opportunity, and there are still many unanswered questions about how it complies with our tax laws. Well, the bad news for crypto investors: it is taxable. Even though it is a digital asset, the IRS considers cryptocurrency ‘assets’. This means that they are treated in the same way as other assets.
At the beginning of the new tax season, prepare yourself for the coming year. And it is important that you do so because it is up to the taxpayer to register their crypto transactions.
What is taxable?
If you sell crypto assets in dollars, trade in other crypto assets or use them to buy anything (digital or real world), you must report your profits and losses on your tax return. If you find any cryptocurrency in mining or compensation, you should keep in mind – it will be treated with income tax rates.
Basically, any crypto trade or sale is taxable. Crypto is a taxable event every time you trade. For example, if you trade Bitcoin for Ethereum, you must report it on your tax return.
What is tax free?
There is some good news for crypto investors. If you have no interest in your property, you do not have to pay taxes – by locking your cryptocurrency on a digital platform. In addition, receiving a gift or transferring a wallet through a wallet is tax-free and non-taxable. Buying a cryptocurrency in US dollars is also tax-free.
Unclear Crypto Tax Laws
While in the UK, HMRC is now becoming more and more interested in crypto transactions and tax implications, and the IRS has not fully enforced the cryptic tax law. For example, it is still unclear how long the capital tax will be paid on NFTs, which are similar to cryptocurrencies for tax purposes. NFTs can be classified as an art or collection, depending on how they trade. Art and collectibles have two different tax rates.
The gray area also extends to how to deal with the interest and laundry law obtained by Stacking. The latter prevents investors from buying the same property within 30 days after the sale. However, it is not clear whether this applies to crypto. As a taxpayer, your best choice is to record all your transactions and carefully support your tax return.
When to report Cryptocurrency on your tax return
The US tax year runs from January to December. You must report crypto transactions on the same tax return as your other investments and capital. You must file your tax return in April of the following year. Unfortunately, like other assets, you have to keep track of all your crypto trades yourself.
How much tax do I have to pay?
Like other assets, you pay tax on the difference between the amount you sell and the amount you buy – basically your crypto profits and losses during the tax year.
For example, you buy $ 100 worth of Bitcoin and sell it for $ 500, earning $ 400. If Bitcoin loses value, you incur a capital loss. You can deduct losses from your taxable income.
The length of time you own your property will affect how much tax you pay. If you have owned your Bitcoin for more than a year, it is a long-term capital gain. It is a short-term capital gain if purchased and sold in the same year and is taxed as ordinary income.
Reporting Crypto Revenue
Regardless of how you get Crypto, you will need to report your tax return. You will need to register the price in US dollars when you receive it. If you receive a bitcoin in return for services, you must register the correct market value at the time of the transaction.
Suppose a bitcoin costs $ 40,700. You need to mark $ 40,700 as income and track the cost base. If you trade bitcoin online, it is your responsibility to balance the cost with the value of the transaction.
Keep track of your activities.
This is a difficult place to manage crypto taxes. When you start trading in crypto, it is your responsibility to keep track of all taxable activities and actual market value.
IRAS states that cryptographic records must be sufficient to establish a tax return. At the very least, it should include details of the time you receive, sell, or exchange and the actual market value of the activity. Logging into Crypto trading is relatively easy, but tracking and copying for tax purposes can be complicated.
However, the future looks bright for crypto taxpayers. In the 2023 tax year, the new Infrastructure Bill will issue crypto exchanges Form 1099-B and report it directly to the IRS for crypto transactions.
How to prepare for the tax season
The best way to prepare for the tax season is to plan. Do not wait until the expiration date to collect your records. Get started now if you have not already done so.
Relatively new crypto investors may find it difficult to keep track of their crypto businesses. However, it can be even more challenging when you start trading between personal wallets and mining. You may want to sit down with a professional to organize your tax-saving strategy.