By Abigail Perry
Crypto is still a relatively new investment opportunity, and there are still many unanswered questions about how it fits into our tax laws. Well, the bad news for crypto investors: it is taxable. Despite being a digital asset, the IRS considers cryptocurrency holdings 'property'. This means they treat it in the same way as other assets.
At the beginning of the new tax season, prepare yourself for the year ahead. And it's important you do because it's down to the taxpayer to record their crypto transactions.
What Is Taxable?
If you sell crypto assets for dollars, trade for other crypto assets, or use them to purchase anything (digital or real-world), you must report your gains and losses on your tax return. If you earn any cryptocurrency through mining or compensation, you must note it—it's treated with income tax rates.
Essentially, any trading or selling of crypto is taxable. Every single time you trade crypto, it's a taxable event. For example, if you trade Bitcoin for Ethereum, you must report it on your tax return.
What Is Not Taxable?
There is some good news for crypto investors. You don't have to pay tax if you earn no interest on your assets through staking—locking up your cryptocurrency on a digital platform. Moreover, receiving cryptocurrency as a gift or transferring between wallets is non-taxable and non-reportable. Purchasing cryptocurrency with US dollars is also non-taxable.
Unclear Crypto Taxation Laws
While in the UK, HMRC is now taking a greater interest in crypto transactions and the tax implications, the IRS hasn't wholly solidified its taxation laws surrounding crypto. For example, it's still unclear how long-term capital gains on non-fungible tokens (NFTs) are taxed, which could be viewed the same as crypto for tax purposes. NFTs may classify as art or collectibles, depending on how you trade them. Art and collectibles have two different tax rates.
Furthermore, the gray area extends to how to treat the interest earned through staking and the wash-sale rule. The latter prevents investors from repurchasing the same asset within 30 days of selling and claiming a loss. However, it's unclear whether this applies to crypto. Your best bet, as a taxpayer, is to record all your transactions and lean conservatively on your tax return.
When to Report Cryptocurrency on Your Tax Return
The US tax year runs from January through to the end of December. You should report crypto transactions on the same tax return as your other investments and capital gains. You must file your taxes by April of the following year. Unfortunately, unlike other assets, you must track all your crypto trades yourself.
How Much Tax Will I Owe?
As with any other asset, you pay tax on the difference between the amount you sell and the amount you buy—essentially, your capital crypto gains and losses within the tax year.
For instance, if you buy $100 worth of Bitcoin and sell it for $500, you've made a taxable capital gain of $400. If Bitcoin loses value, you've made a capital loss. You can deduct losses from your taxable income.
The length of time you own an asset affects how much tax you pay. If you have owned your Bitcoin for more than a year, it's a long-term capital gain. If it's bought and sold within the same year, it's a short-term capital gain and is taxed as ordinary income.
Reporting Crypto Income
Regardless of how you earn crypto, you'll need to report it on your tax return. You need to record its value in US dollars when you receive it. If you get one Bitcoin in return for services, you need to register its fair market value at the transaction time.
Say the value of one Bitcoin is $40,700. You'll need to mark $40,700 as revenue and track the cost basis. If you trade Bitcoin down the line, it's your responsibility to reconcile its cost basis with its value in the transaction.
Track Your Activity
This is where cryptocurrency taxes can get harder to manage. When you start dealing in crypto, it's your responsibility to keep track of all potentially taxable activities and the fair market value.
The IRS guidelines state that crypto records should be sufficient to establish a tax return. At the very least, it should include details of the time you receive, sell, or exchange virtual currency and its fair market value throughout the activity. While getting into crypto trading is relatively simple, tracking and recording for tax purposes can get complex.
However, the future looks brighter for crypto taxpayers. In the 2023 tax year, the new infrastructure bill states crypto exchanges must issue a 1099-B form and directly notify the IRS of crypto transactions.
How to Prepare for Tax Season
The best way to prepare for tax season is to plan. Don't wait until a few weeks before the deadline to gather your records. Start now if you've not taken detailed notes of all your transactions and the fair market value.
Relatively new crypto investors might not have a hard time tracking their crypto trades. However, it gets more challenging when you start trading between personal wallets and mining operations. You might want to sit down with a professional to organize your tax-saving strategy.
