No matter how you obtained or used bitcoin, you may be liable for cryptocurrency taxes if you did. Here are some possible tax repercussions of using bitcoin.
Crypto traders may have important tax concerns on their minds due to the startling rise and fall of some cryptocurrencies, such as Bitcoin and Ethereum. Even those who hold the currency, let alone trade it, need to take precautions to ensure they don’t break the law because the Internal Revenue Service (IRS) is stepping up enforcement efforts. Given how the IRS views cryptocurrencies, that might be simpler to accomplish than you imagine.
Your virtual currency is taxed the same as any other asset because the IRS views cryptocurrency holdings as “property” for tax purposes.
Here are some essential details about cryptocurrency taxes and how to follow the law that you should be aware of.
Do cryptocurrency taxes need to be paid?
Cryptocurrencies are not considered to be currencies by the IRS, but rather a class of property. You must pay taxes on Bitcoin’s current value if you accept it as payment. You must pay taxes on the difference between the price you paid for the cryptocurrency and the sale’s proceeds if you sell it for a profit.
However, the specifics of how cryptocurrency taxes are calculated depend on your unique situation. The bottom line is as follows:
- It is not necessary to sell the cryptocurrency in order to incur a tax liability if you obtained a Bitcoin (or a portion of one) through mining.
- If you sold or used crypto by cashing it out on an exchange or purchasing goods and services, you will be responsible for paying taxes if the realized value exceeds the price you paid for the cryptocurrency. You might have a capital gain that is subject to either long- or short-term taxation.
Purchasing and selling cryptocurrencies has some of the same tax repercussions as purchasing and selling more conventional assets, like real estate or stocks, according to Brian Harris, a tax lawyer with Fogarty Mueller Harris, PLLC in Tampa, Florida.
How are cryptocurrency taxes reported?
Despite some recent modifications to cryptocurrency tax laws, it is still largely the responsibility of the individual to keep track of their gains and losses. Remember that the IRS now includes a question on tax return forms asking taxpayers if they received, sold, traded, or otherwise disposed of “any financial interest in any virtual currency.”
Keep thorough records to ensure that you adhere to the regulations.
- You must keep track of your cryptocurrency’s fair market value both when you bought it or mined it, as well as when you used it or sold it. You can use that data to estimate your Bitcoin or cryptocurrency taxes.
- It’s possible that this data is not readily accessible. For instance, if you were buying and selling stocks, your broker would send you a Form 1099-B which would detail the transaction’s cost basis. But if you use cryptocurrency, you might not get one, which is one of the reasons many people are unaware they must pay cryptocurrency taxes. Beginning in 2023, the federal government will start requiring cryptocurrency brokers to send these forms.
- If you make over $20,000 in payments and 200 transactions each year, a Form 1099-K may be issued. However, both requirements must be fulfilled, and many individuals might not use Bitcoin or other cryptos 200 times a year. But, regardless of whether you go over these limits, you must still pay taxes on any gains.
What happens if you fail to report your crypto taxes?
Although many cryptocurrencies place a strong emphasis on privacy, this does not mean that cryptocurrency traders are protected by an invisible wall. The IRS monitors the sector using a variety of techniques. By sending subpoenas to the companies that run popular crypto exchanges, for instance, it has learned details about tens of thousands of their users.
Even though it might be an honest mistake to fail to pay taxes on your gains, don’t expect the IRS to feel bad for you.
The IRS might not have the resources, according to Harris, to go after every person who doesn’t report cryptocurrency transactions. However, because they believe the IRS won’t find out about their transactions, they shouldn’t report them.
The IRS might not have the resources, according to Harris, to go after every person who doesn’t report cryptocurrency transactions. Though he adds, “that doesn’t mean people shouldn’t report those transactions because they don’t think the IRS is going to find out about it.”
There are legal ways to lessen your tax obligation. In fact, you might be able to save money by using a technique called tax loss harvesting if you keep close tabs on your returns. However, you might run into issues if you don’t report your cryptocurrency trading income.
Consider working with an Accountant
Consider consulting a tax expert who has experience interpreting tax laws related to virtual currencies even if you aren’t engaging in complex crypto activities and simply have questions about your specific tax obligation or aren’t sure if you’re reporting correctly.
There are many gaps in the current guidance, and the IRS and other regulators cannot provide instructions on every circumstance a taxpayer might encounter. It’s critical to find a tax expert who is knowledgeable about current IRS guidance and has experience disclosing cryptocurrency gains and losses.
Make sure potential tax professionals are aware of the ambiguities in the tax code and ask them if they own any virtual currency themselves.
How to Get Ready for Tax Season With Crypto
Planning ahead is the best thing you can do to make your 2022 tax filing for cryptocurrencies simpler. Even if that’s how you usually approach tax season, don’t put off gathering your records and calculating your debt until April 1, 2023.
You don’t want to be trying to catch up with a year’s worth of cryptocurrency activity in April, warns says Pat White, co-founder, and CEO of Bitwave, a company that helps businesses with crypto tax reporting. “You really want to treat it more like a business, where you are trying to ensure that all of your taxes are current on a monthly basis, making sure you are monitoring things properly, and being more assertive about it,” said the author.
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