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Bitcoin and cryptocurrency taxes in 2022: Everything you need to know

Bitcoin and cryptocurrency taxes in 2022: Everything you need to know
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If you buy, sell or trade Cryptocurrency In 2021, you may have questions about how to tax it. The IRS deals with virtual currencies, such as Bitcoin And ether, differently than some other assets and investments, there are specific rules you’ll need to follow if you sold or traded these assets last year.

“The average investor needs to understand that cryptocurrency is not like any other type of currency out there. Cryptocurrency is treated as property for tax purposes,” says Shaun Hunley, Thomson Reuters tax advisor. “So anytime you are going to use cryptocurrency or transact with cryptocurrency, you will have the potential to win or lose in [your] Tax return.”

However, there is an important caveat: if you used fiat currency – that is, the US dollar – to purchase crypto assets in 2021, you will not have to report anything about it when you return. (For now, at least – this is a rapidly developing area of ​​tax law, and US law in general.)

However, if you sell cryptocurrency, you will need to report this upon your return. And if you exchange one cryptocurrency for another, you will also have to report it. The good news is that reporting gains and losses is fairly straightforward once you know the ropes — and there are tools to help you, if you’re not inclined to take on the math and accounting yourself. Read on to learn everything you need to know about handling cryptocurrency in your federal and state tax returns this year.

Noticeable: The following applies to US citizens and resident aliens. If you earn money from cryptocurrency in foreign countries, you may also have to pay taxes there.

How will the IRS deal with cryptocurrency in 2021 taxes?

As it has been doing since 2019, the IRS will again ask about your cryptocurrency. This year, the US Individual Income Tax Return Form 1040 includes a question about cryptocurrency: “At any time during 2021 did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” And while the IRS technically asks about “receiving” cryptocurrencies, in reality they focus heavily on whether you mine them — by selling them or trading them.

“If you only buy cryptocurrency in US dollars, and that’s all you do during the year — you don’t sell it, you don’t exchange it, you keep it in your wallet all year long — you can check for a ‘no’ in this question,” Hunley says.

The IRS has updated its Digital Currency FAQ page to emphasize this point as well: “If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”

Currently, bitcoin and other cryptocurrencies are considered property by the IRS. So, if you buy and keep all of bitcoin, you don’t need to go into it on your tax return.

“The bottom line is that the IRS looks for taxable transactions. So if you have a taxable transaction, you should check ‘Yes.’ If you have a non-taxable transaction, you select ‘No’,” Hunley said. .

So, if you only buy I buy Bitcoin (or other cryptocurrency) on Coinbase, for example, do you need to report it?

shout out. If you used US dollars to buy cryptocurrency on an exchange (or through a private transaction), there is no need to report it.

Well, I sold some bitcoin. Do I need to report this on my taxes?

Yes. Once you sell, and “make” a gain or loss, you have to report it — and pay taxes on any capital gains.

What are capital gains and losses?

In short, they are the difference between the cost of an asset when it was purchased and when it was sold. If the price goes up, it is a capital gain. If it goes down, that’s a capital loss. The IRS has published a longer and more detailed explanation.

The other thing to know about capital gains is that the IRS classifies them as short-term or long-term. Generally, returns associated with assets you’ve held for more than 365 days will be classified as long-term capital gains, which are typically taxed at 15 percent. Any assets held for a shorter period are short-term gains, and are taxed like ordinary income – at rates that can be as high as 37 percent.

Of course, this works both ways. If you lost money from crypto scams last year, you can now deduct those losses from your revenue. (The IRS sets capital loss deductions at $3,000 per year, or $1,500 if you marry and file separately.)

How do I calculate cryptocurrency capital gains and losses?

For each trade – partial or full – you will need to know the following details:

  1. When did you buy the coins
  2. How much did you pay them (in US dollars)
  3. When you sell the coins
  4. How much did you get them

More complex exchanges may have a reporting mechanism to help you collect this type of information. Otherwise, unless you keep your own detailed records, you may need root access through email, bank, or wallet receipts.

Once you have this information on hand, there are many options available for making the calculations. For example, some investors use a “first in, first out” (or FIFO) methodology, where the first coins you buy (and the price at which they cost) are also the first coins you sell. We won’t cover all the methods and math here. You can use Google to learn more about capital gains account options.

I traded bitcoin (or another currency) for some ether, dogecoin, etc. Do I need to report my taxes?

Yes. Trading one cryptocurrency into another is a taxable event.

What tax form do I use to report cryptocurrency?

This is all listed on Schedule D, the federal tax form used to report capital gains.

Paid for people using bitcoin. Do I need to submit a file?

Yes, you will need to report employee earnings on your W-2 to the IRS. And if you compensate the contractors with cryptocurrency, you will need to issue a 1099 to them.

I sold $100 worth of bitcoin last year. Do I need to worry about all this?

Yes. If you sell bitcoin for a gain, it qualifies as a taxable event. Although the IRS typically dedicates its investigative resources to the big fish, audit-wise, the device dedicates more resources to cryptographic forensics, and you better play it safe.

Will I receive any tax forms for the crypto exchange or market I am using?

Some exchanges may send a Form 1099-K to clients who meet certain thresholds of volume or value. Coinbase customers who earned rewards and/or fees of $600 or more through Coinbase, Coinbase Pro, and Coinbase Prime will receive a 1099-MISC form.

Is there a program to help me sort this out?

Yes. TurboTax, H&R Block and some others online tax platforms It will lead you through the registration process for these types of transactions. If the platform of your choice does not support encryption, you should be able to use any existing system for reporting equity-related capital gains or losses as an alternative.

There are also specialized tools available, such as CoinTracker, that provide customized tax reporting support for cryptocurrencies – including more complex scenarios for frequent traders or people with multiple wallets. (Full disclosure: We haven’t tested Cointracker.IO yet and are still evaluating the crypto reporting capabilities of the major tax platforms.)

Who can help me find out my bitcoin taxes?

If you are looking for more on hand holdings, we urge you to consult a tax professional. Basic tax code is remarkably complex, and crypto business can quickly become horribly complex. When in doubt, hire a professional.

“I always tell people to tell your tax preparer ahead of time that you are investing in cryptocurrency,” Hunley said. “And if you’re going to invest in cryptocurrency, and if you can hold it for more than a year, you need to do that. Then you get a lower tax rate, and you want to take advantage of that.”

And as with everything related to cryptocurrency: do your research, pay your taxes and Buyer awareness.

First published on February 21, 2018 at 9:24AM PT.

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