2022 has been a difficult year for those who buy and sell cryptocurrency. According to the Pew Research Center’s latest findings, 46% of US adults who have invested in, traded, or used cryptocurrency report their investments have done worse than they expected.
With drastic fluctuations in crypto prices—and the market as a whole—many speculators will have losses on their digital assets they can deduct against capital gains up to a $3k net loss position, just as you would for losses on stocks or bonds. For federal tax purposes, virtual currency is treated as property, which means your virtual currency is taxed in the same way as other assets you own.
With requirements continually expanding, the best thing you can do to simplify your crypto-related tax filing is start planning ahead now.
Keep track of your cryptocurrency transactions
If you’re not already keeping track of your potentially taxable activities, you need to. The IRS requires records any time you sell or exchange virtual currency. You should also be keeping track of your cost basis—what you originally paid for your crypto—as accurately as possible. Even if you are just trading cryptocurrency, keep in mind it’s still a taxable event.
The amount of time you owned your cryptocurrency determines if it’s taxed as a long-term capital gain or a short-term gain, affecting which tax rate is applied. If you held onto cryptocurrency for more than a year, it would generally qualify as a long-term capital gain. But if you bought and sold it within a year, it’s a short-term gain.
The tax rate also varies based on your overall taxable income, with limits to how much you may deduct in capital losses if your crypto loses value. Long-term gains are taxed at a reduced capital gains rate (0%, 15%, or 20% at the federal level depending on your income level), whereas short-term gains are taxed at your ordinary income rate.
When transactions are taxed
Since cryptocurrency is treated like investing, the sale of a cryptocurrency or its exchange for another type of cryptocurrency triggers a tax on any profit from that transaction. Even if it is not being exchanged into US dollars, you can still incur a tax bill whenever you’re disposing of assets.
The following are examples of when cryptocurrency is a taxable activity:
- Selling cryptocurrency for fiat money (USD, EUR, JPY, etc.)
- Trading cryptocurrency for another type of cryptocurrency
- Using cryptocurrency to buy a good or service
- Buying, selling, or trading an NFT
The difference between the amount you spent when you bought or received the crypto (its cost basis) and the amount you earn for its sale is the capital gain or capital loss. Any gains or losses must be reported to the IRS.
Additionally, if you received cryptocurrency as payment for a service or in lieu of a paycheck, your crypto will be taxed as compensation in accordance with your income tax bracket. Mining crypto, earning staking rewards, getting an airdrop, and more transactions can be recognized as income.
The following are examples of when cryptocurrency is not a taxable activity:
- Buying crypto with cash and holding it
- Donating crypto to a qualified tax-exempt charity of non-profit
- Receiving a gift of cryptocurrency
- Giving crypto as a gift of up to $16,000 per recipient per year for 2022 ($15,000 for 2021)
- Transferring crypto between accounts or wallets
This list isn’t comprehensive or exhaustive, so keep track of any time you receive “free” cryptocurrency (except as a bonafide gift), as it is likely to be subject to tax.
Reporting Digital Assets Under the Infrastructure Act
In late 2021, President Biden signed the Infrastructure Investment and Jobs Act. The definition of a broker was expanded to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” The act also defines a digital asset as “any digital representation of value which is recorded on a cryptographically secured distribution ledger or any similar technology.”
Though these new requirements of the Infrastructure Investment and Jobs Act are effective for returns filed and statements required after December 31, 2023, you should begin planning for these changes soon.
Currently, brokers send Form 1099-B to report details related to financial accounts to the IRS and their customers. This form itemizes all transactions made during a tax year and creates a sum of the individual’s taxable gain. Moving forward, the 1099-B form will be required for cryptocurrency transactions.
When transferring securities to another broker, all brokers are required to provide a transfer statement, including a customer’s cost basis and holding period. Under the Act, these transfer statements will be required for digital assets—including cryptocurrency—not only to other brokers but also to non-brokers. This will result in transfer statements being required for transactions such as customers moving tokens from an exchange to an electronic wallet.
Under the Infrastructure Act, digital assets, including but not limited to cryptocurrency, will be treated as “cash.” With existing requirements in place, treating digital assets as cash means you will be required to report on Form 8300 the receipt of more than $10,000 in one transaction.
If you're not already, you should keep track of your cost basis—what you originally paid for your crypto—as accurately as possible. Because this is a new requirement, you'll want to confirm your cost basis matches the cost basis being reported by your broker.
With these changes, brokers will need to track and report cryptocurrency and digital asset transactions. Failure to comply with this new reporting requirement can result in both civil and criminal penalties, including up to $3 million per customer for failure to provide all required information.
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The world of cryptocurrency is increasingly complex and difficult to understand, and as it continues to grow, so too will the tax policies and financial regulations surrounding cryptocurrency. As things continue to evolve, we will be here to guide you through any changes or questions.