1. Will you be questioned whether you own or use cryptocurrency?
You must declare if you have transacted in cryptocurrencies on your 2021 tax return. “Did you receive, sell, transmit, swap, or otherwise acquire any financial interest in any virtual currency at any point during 2021?” asks Form 1040 towards the top.
Short-term capital gains are taxed at ordinary rates for assets held less than a year (up to 37 percent in 2021 and 2022, depending on your income). People who retain assets for over a year should pay less long-term capital gains tax (0, 15 and 20 percent).
There is, however, a footnote. The IRS recently clarified that taxpayers who only bought virtual currency with actual money were not required to respond “yes” to the query.
2. Just because you didn’t get a 1099 doesn’t mean you’re not subject to taxation.
Normally, a bank or stockbroker sends you (and the IRS) a Form 1099 detailing your earnings for the year. However, this may not be the case with cryptocurrencies.
“In comparison to traditional 1099 forms for stocks, interest, and other payments, there isn’t really the same amount of reporting for bitcoin currently,” Harris explains. “Coinbase and other exchanges don’t provide the IRS with good reporting.”
However, from Jan. 1, 2023, a legislation passed in November 2021 will mandate higher tax reporting for people in the business. Brokers – and, more controversially, anybody who transfers digital assets for another – are required by law to disclose this information to the IRS on a 1099 or similar form.
Opponents argue that the bill will bind everyone who transfers cryptocurrency, such as miners and crypto wallets, to the new standards, even if they don’t have access to the information. However, legislators are already working on a new bill to reduce the scope of the law’s application.
However, the absence of a 1099 won’t exempt you from paying taxes; you’ll still have to declare and pay taxes on your earnings. However, it’s not all bad news: if you were to take a capital loss, you may deduct it from your taxes and lower your taxable income.
3. Simply utilising cryptocurrency exposes you to the risk of being taxed.
You might believe that if you only use cryptocurrency and don’t trade it, you aren’t liable for taxes.
That is not the case!
You may incur a tax liability whenever you exchange virtual currency for real currency, goods, or services. If the price you realise for your cryptocurrency – the value of the item or actual cash you get – is more than your cost basis in the cryptocurrency, you’ll generate a liability. You’ve got a tax burden if you obtain more value out of the bitcoin than you put into it.
Of However, you might have a tax loss if the value of products, services, or actual money is less than your bitcoin cost basis.
To do the computation in any instance, you’ll need to know your cost base.
This isn’t a transaction tax, so keep that in mind. It’s a capital gains tax, or a tax on the cryptocurrency’s recognised change in value. You haven’t realised a gain or loss if you don’t trade the cryptocurrency for anything else, just as you haven’t realised a gain or loss if you don’t exchange the cryptocurrency for something else.
4. Crypto trading profits are taxed the same as ordinary capital gains.
So you made a profit on a successful transaction or purchase? The IRS handles bitcoin earnings in the same way it does any other kind of financial gain.
Short-term capital gains are taxed at ordinary rates (up to 37 percent in 2021 and 2022, depending on your income). On the other hand, long-term capital gains taxation is expected to be lower (0, 15 and 20 percent).
The same regulations apply to cryptocurrencies when it comes to offsetting capital gains and losses against each other. As a result, capital losses may be deducted, resulting in a net loss of up to $3,000 each year. If your net losses surpass this level, you must carry them forward to the next year.
5. Crypto miners may be treated differently from the rest of the population.
Do you run a bitcoin mining operation? Then, like a conventional firm, you could be able to deduct your expenditures. The worth of what you create determines your income.
“If you mine cryptocurrencies, you are paid at fair market value, so that’s your cryptocurrency foundation,” Harris explains. “Your costs may be deductible if this is a trade or enterprise.”
But it’s the final part that’s important: you have to be in charge of a trade or company to be eligible. You can’t run your mining equipment as a hobby and get the same tax benefits as if it were a company.
6. A bitcoin gift is regarded in the same way as regular presents.
If you’ve given cryptocurrencies to someone as a method to pique their interest, such as a younger relative, your present will be considered the same as any other such gift. If it exceeds $15,000 in 2021 (or $16,000 in 2022), it may be liable to the gift tax. When it’s time for the receiver to sell the present, the cost basis is the same as it was for the donor.
However, even if you exceed the yearly level, there are certain methods to avoid the gift tax, such as using the lifetime exemption.
7. Cryptocurrency is handled the same as other inherited assets.
Inherited cryptocurrency is treated similarly to other capital assets passed down through the generations. If the estate surpasses specified criteria ($11.7 million in 2021 and $12.06 million in 2022, respectively), they may be liable to estate taxes.
Cryptocurrency, like stocks, has a cost basis that is stepped up to the fair value on the day of death. According to Harris, most individuals regard cryptocurrencies as a traditional capital asset.
Using cryptocurrencies to maintain your cost basis, identify your effective realised price, and maybe owing tax can be time consuming (even without an official Form 1099 statement). Moreover, the IRS is scrutinising bitcoin traders for alleged tax avoidance. All of these limitations make cryptocurrencies more difficult to use, which will hamper their widespread adoption.
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