Cryptocurrency taxation: Here’s what you need to know

As with most investments, taxes will need to be considered before determining what you have actually gained (or lost) in your digital assets.

So if you can’t resist participating in, say, the wild bitcoin ride – which, for those who keep the score, is more than 50% below its all-time high – consider the following.

Before figuring out your tax obligations, you should first be clear about what is considered a taxable event when it comes to buying and selling crypto.

Purchase and operation: Simply buying and holding a virtual currency as a crypto is not taxable. And you don’t have to report specific information on your tax return, according to the IRS, just as you wouldn’t report a stock or other asset you bought and have in a brokerage account. (Although in this example, you would have to report any dividends or interest generated by the investment.)

But what do you do with your cryptography after buying for the first time can 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 property.

To make matters worse, using crypto to buy something technically counts as selling your crypto. Therefore, you must report any capital gains or losses on that sale, which will be determined by the difference – in US dollars – between what you paid for the currency and its value when you used it to buy something.

If you had cryptography for one year or less and valued in value, its capital gain will be taxed as ordinary income. If you kept it for more than a year, you would be subject to capital gains tax rates.

If it has lost value, you can use that capital loss to offset any capital gains you may have incurred on other investments.

Payment in cryptography: If you are paid in bitcoins or any other digital currency, it will be treated as taxable income. The amount reported must be fair market value in US dollars of the virtual currency on the day it was received.
Pay someone in a virtual currency: This is like selling your currency in which you will have a profit or loss. The IRS notes that the gain or loss is determined by the difference between the fair market value of the good or service you purchase and its adjusted base in the virtual currency used in the transaction (that is, calculated using its original cost to purchase the currency). and the fees or commissions you paid to do so). Here’s a very simplified example: if you paid someone in bitcoin for a $ 1,000 plumbing job and the base cost of bitcoin was $ 500, you would have a $ 500 capital gain that you owe in taxes.
In all these cases, if you do not pay the tax you owe, you will be subject to interest and penalties and, in some circumstances, even criminal prosecution.

Will my status record my cryptographic transactions?

Don’t forget about state taxes.

“Most states have not specifically addressed virtual currency, which means that most states that have an income tax would follow the federal leadership,” Luscombe said.

Any money you earn with your cryptocurrency investments or income payments will be included in your federal adjusted gross income. And most states use their federal AGI as a starting point.

Two states, Nevada and Wyoming, neither of which has income tax, specified they would not subject virtual currency transactions to state property tax, Luscombe said.

(For more information on these and other questions, the IRS has created these frequently asked questions. And if your situation is particularly complex, consult an experienced tax professional.)

New touch reporting requirements

At this time you still have to keep all records of your cryptographic transactions and report those taxable to the IRS. You will also be asked to prove at the top of your 1040 form if you have received, sold, shipped, exchanged or acquired any financial interest in any virtual currency during the fiscal year.
But the IRS did not rely solely on your word. For example, any company that pays more than $ 600 to a non-employee or pays wages to an employee must report that income to the IRS, said Mark Luscombe, chief federal tax analyst at Wolters Kluwer Tax & Accounting. If you do not report the income you received, you could sign up for an audit and / or an underestimation penalty.

But from the fiscal year 2023, all of your potentially taxable digital asset transactions will be reported to the agency by third parties.

It is no different from the third-party reporting requirements that apply when you have a job or invest in stocks. You and the IRS get a W-2 a form from your employer reporting your annual earnings and a form 1099 from your broker reporting your stock transactions.

In an effort to make money laundering difficult, next year a company must report to the IRS each time it receives more than $ 10,000 in a single transaction (or two or more related transactions), just as it should when it receives effective. above that threshold. Failure to do so may be prosecuted as a federal offense.

You cannot remain anonymous

The new reporting requirements represent a positive potential for cryptocurrency investments in two ways: they are a sign that the cryptocurrency is here to stay. And given the headache of trying to keep track of all your transactions, getting a 1099 May prove useful.

But the downside will be the loss of anonymity for those who want to keep their transactions private, or who have not complied with their tax obligations.

When you open a bank or brokerage account, you have to provide a lot of verified personal information to confirm that you are who you claim to be. You must provide your legal name, address, telephone number and a Social Security number or other tax identification number, among other things.

But when you set up cryptocurrency-related accounts, the information requested varies by platform.

“Until this year, it was quite common for you to be able to open [an account or digital wallet] with a name and email, “said Erin Fennimore, chief reporting officer for TaxBit, a provider of cryptocurrency tax software.

2023 is coming, that will change in many cases. “You will be asked for personal information that you have probably not been asked for in the past,” Fennimore said.

And the platforms needed to report your transactions will need to verify your identity.

In addition, when transferring a digital asset from one broker to another, the transferring broker will need to issue a statement to the receiving broker that includes information about the basis and retention period for the transferred broker. crypto so that the receiving broker can meet its 1099 reporting requirements.

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