Things to Know about Crypto Tax

Welcome to the Topic “Things to Know about Crypto Tax“

Declaration of Virtual Currencies: You must declare whether you have transacted in cryptocurrencies on your 2021 tax return. “Did you receive, sell, send, swap, or otherwise acquire any financial interest in any virtual currency at any time during 2021?” asks Form 1040 towards the top. As a result, you’re obligated to answer definitively whether you’ve transacted in cryptocurrency, potentially putting you in a position to deceive the IRS. If you don’t answer honestly, you risk putting yourself in even more legal trouble, and the IRS doesn’t like liars and tax cheats. There is, however, a footnote. The IRS recently clarified that taxpayers who only bought virtual currency with actual money were not required to respond “yes” to the query.

No Escape from being Taxed: You (and the IRS) will normally receive a Form 1099 from a bank or brokerage reflecting the income you received throughout the year. However, this may not be the case with cryptocurrencies. ” In comparison to traditional 1099 forms for stocks, interest, and other payments, there isn’t the same amount of reporting for bitcoin currently,” Harris explains. “Coinbase and other exchanges don’t provide the IRS with good reporting.”

However, from Jan. 1, 2023, a law passed in November 2021 will mandate higher tax reporting for those in the industry. Brokers – and, more controversially, anyone who moves digital assets for another – are required by law to report this information to the IRS on a 1099 or similar form.

Tax Liable: You may incur a tax penalty if you trade virtual currency for real currency, products, or services. If the price you realize for your cryptocurrency – the value of the good or actual currency you receive – is higher than your cost basis in the cryptocurrency, you’ll generate a liability. You’ve got a tax burden if you obtain more value from the bitcoin than you put into it. However, you could have a tax loss if the value of products, services, or actual currency is less than your bitcoin cost basis. To make the computation in any instance, you’ll need to know your cost basis.

Tax on your Gains: So, you made a profit on a successful transaction or purchase? The IRS treats bitcoin gains in the same way it treats any other type of financial gain. That is, short-term capital gains for assets held less than a year will be taxed at standard rates (up to 37 percent in 2021 and 2022, depending on your income). However, if you own assets for more than a year, you’ll be subject to long-term capital gains tax, which is likely lower (0, 15, and 20 percent).

Mining: Do you run a bitcoin mining operation? Then, like a conventional firm, you could be able to deduct your expenses. The value of what you produce determines your revenue.

“If you mine cryptocurrencies, you are paid at fair market value, so that’s your cryptocurrency basis,” Harris explains. “Your expenses may be deductible if this is a trade or enterprise.”

But it’s the final part that’s important: you have to be in charge of a trade or business to be eligible. You can’t run your mining equipment as a hobby and get the same tax benefits as if it were a business.