Crypto tax. Image: Shutterstock Tax season is upon us, which means that it’s time to trawl through your finances and get your incomings and outgoings in order.
Tax liability is a thorny area when it comes to Bitcoin and other digital assets. The truth is that Internal Revenue Service (IRS) reporting guidelines on crypto are still evolving. This, combined with the frequency with which transactions may take place, can make filing crypto taxes seem like a daunting task for investors and traders alike.
Fortunately, new tools like Cointelli’ s crypto tax reporting software can help to take the sting out of the process. In this article, we’ll answer some common questions and misapprehensions about taxes on cryptocurrency—starting with “Do I have to pay tax at all?” “Do I have to pay taxes on my crypto?”
In the past 24 months, the IRS has cast a much broader net , and taxing crypto is seen as an important new revenue source to pay for mounting pandemic expenses, foremost the $1.2 trillion infrastructure bill .
Notably, a standard 1040 form now asks every American if they own crypto—which is classed as property—and gains must be reported to the IRS as with any investment. In some cases, even if zero money is owed, you are still required to file your taxes. “What happens if I don’t pay?”
New legislation from last November requires brokers and cryptocurrency exchanges to notify the IRS directly of crypto transactions, closing a loophole that enabled some investors to hide their gains.
But oftentimes payment failures are the result of taxpayers not understanding the process—which one congressional witness described as nothing short of a nightmare .
Taxpayers must file their taxes before the April 18 deadline and failure to file can result in penalty fees, interest, audits, and even jail. “How is crypto taxed?”
Crypto transactions fall into three categories: capital gains, ordinary income, and nontaxable transactions. Three types of crypto transactions. Image: Cointelli Selling or investing in crypto can incur capital gains tax. But the IRS also distinguishes between short-term and long-term gains, which are dealt with differently . Just as with other investments, losses can be offset against gains.
Paying for goods or services using cryptocurrency also generates capital gains if the person making the transaction profited from the difference between the price of the good or service and the purchase price of the cryptocurrency used.
Meanwhile, mining, staking, and other payment streams are dealt with as ordinary income. However, depending on whether you engaged in mining as a business or hobby, the overall tax treatment may be different.
And don’t expect the taxman to turn a blind eye to new coins received from a hard fork resulting in a coin splitting into two. These are also taxable—even retroactively. One example is when Bitcoin Cash forked off from Bitcoin in 2017, which is considered a “taxable event,” meaning that tax becomes due even if the new asset is not sold.
The third category, non-taxable income, includes buying, holding, and donating crypto. “What are the crypto tax rates?”
Gains are taxed at income tax rates that range from 10% to 37% depending on your overall income.
The tax situation becomes more favorable if you hold your crypto for more than a year and then sell. The tax that then becomes due is in the form of a long-term capital gain, which is usually applied at the much lower rates of either 0%, 15%, or 20% for high-income earners. What’s new in crypto taxes in 2022?
Inflation is running at a four-decade high in the U.S., and the IRS has responded by making wide-ranging adjustments that affect crypto investors. Two of the biggest are an increase in the amount of the “Standard Deduction,” which everyone is entitled to before they are taxed, and there are also changes to income brackets.
More specific to crypto, guidance on tax arising from Decentralized Finance ( DeFi ) could also be in prospect, pending the outcome of an ongoing lawsuit against the IRS. DeFi taxation. Image: PwC The case could determine whether staking rewards should be taxed only when they’re sold—rather than when they’re earned, which the current law implies.
The popularity of non-fungible tokens ( NFTs ) comes with tax evasion concerns , putting authorities on the alert. NFT creators, buyers and marketplaces are all potentially liable to pay tax on profits, as consultancy PwC outlines in its 2021 report —which also addresses the current taxation for DeFi.
“The IRS has not released any specific guidance on DeFi […]
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