As with most investments, there will be taxes you need to consider before deciding how much you have actually earned – or lost – on your digital assets.
So if you could not resist participating in e.g. bitcoin’s crazy line – which for those who keep scores is more than 50% below the highest level ever – keep an eye on the following.
Before you can determine your tax liabilities, you must first be aware of what is considered a taxable event when it comes to buying and selling crypto.
Purchase and inventory: Simply buying and holding virtual currency such as crypto is not taxable. And you do not have to report the details of your tax return, according to the IRS, just as you would not report a stock or other asset you have purchased and have in a brokerage account. (Although in this example you would report dividends or interest earned from the investment.)
But what do you do with your crypto After your first purchase, it may be a taxable event.
Using crypto to pay for things: In the United States, you can use cryptocurrency to buy products or services. But it is not treated as cash for tax purposes. Instead, it is considered a property.
To make things more confusing, using crypto to buy something technical counts as selling your crypto. You must therefore disclose any capital gain or loss on this sale, which will be determined by the difference – in US dollars – between the amount you paid for the currency and its value when you used it to buy something.
If you held the crypto for a year or less and has increased in value, your capital gain will be taxed as ordinary income. If you hold it for more than a year, it will be subject to capital gains tax rates.
If it has lost value, you can use this capital loss to offset any capital gains you have made on other investments.
Get payment in crypto: If you are paid in bitcoin or another digital currency, this will be treated as taxable income for you. The amount specified must be fair market value in US dollars of the virtual currency on the day you received it.
Pay someone in virtual currency: This is treated as selling your currency on which you want to realize a gain or a loss. The IRS notes that the gain or loss is determined by the difference between the fair market value of the product or service you purchase and your adjusted basis in the virtual currency used in the transaction (i.e., calculated using your original purchase price). currency and any fees or commissions you have paid to do so). Here’s a simple example: If you were paying someone in bitcoin for a $ 1,000 plumbing job, and the basic cost of bitcoin was $ 500, you would have a capital gain of $ 500, which you owe tax on.
In all these cases, if you do not pay the tax you owe, you will be liable for interest and fines and in some circumstances even criminal prosecution.
Will my state tax my cryptocurrencies?
Do not forget state taxes.
“Most states have not specifically addressed virtual currency, which means the majority of states that have income taxes will follow the federal lead,” Luscombe said.
All money you earn on your crypto investments or income payments counts toward your adjusted federal gross income. And most states use your federal AGI as a starting point.
Two states – Nevada and Wyoming, none of which have income taxes – specified they would not subject virtual currency transactions to state property taxes, Luscombe said.
(For more information on these and other issues, the IRS has created this FAQ. And if your situation is particularly complex, contact a tax expert with experience in this area).
New reporting requirements at hand
At present, you are still responsible for keeping all records of your cryptocurrencies and reporting those that are taxable to the IRS. You will also be asked to certify at the top of your Form 1040 whether you have received, sold, sent, exchanged or otherwise acquired a financial interest in virtual currency during the tax year.
But the IRS did not just take your word for it. For example, any business that pays more than $ 600 to a non-employee or pays a salary to an employee must report that income to the IRS, said Mark Luscombe, senior federal tax analyst at Wolters Kluwer Tax & Accounting. If you do not report this income you have received, you may be subject to an audit and / or a fine for underreporting.
But from the tax year 2023, everything of your potentially taxable transactions with digital assets will be reported to the agency by third parties.
This does not differ from third-party reporting requirements that are in place when you are employed or investing in stocks. You and the IRS get a W-2 a form from your employer that reports your annual income and a form 1099 from your broker that reports your stock trades.
In an effort to make money laundering more difficult, a company must report to the IRS next year whenever it receives more than $ 10,000 in cryptocurrency in a single transaction (or two or more (more related transactions), just as it must when it does receives money. above this threshold. Failure to do so intentionally can be prosecuted as a federal crime.
You can not be anonymous
The new reporting requirements represent a potential benefit to crypto investors in two ways: They are a sign that crypto is here to stay. And considering the headache of trying to keep track of all your transactions, you get a 1099 can prove useful.
But the disadvantage will be a loss of anonymity for those who want to keep their transactions private or who have not fulfilled their tax obligations.
When you open a bank or broker account, enter a lot of personal information that is cross-checked to confirm that you are who you say you are. You must, among other things, provide your legal name, address, telephone number and a civil registration number or other tax identification number.
However, when you create crypto-related accounts, the information you are asked to provide varies from platform to platform.
“Until this year, it was quite common to open [an account or digital wallet] with a name and email address, ”said Erin Fennimore, head of information reporting at TaxBit, a cryptocurrency tax software provider.
By 2023, that will change in many cases. “You will be asked for personal information that you probably have not been asked before,” Fennimore said.
And the platforms required to report your transactions must verify your identity.
In addition, when a digital asset is transferred from one broker to another, the transferring broker must issue a statement to the receiving broker containing information about the basis and retention period of the transfer. crypto so that the receiving broker can meet their 1099 reporting requirements.