What you need to know
- From December 2020 to December 2021, the price of the cryptocurrency increased significantly, but has fallen since then.
- Cryptocurrencies are considered proprietary, which means that the proceeds from the sale are treated as long or short-term capital gains or losses.
- The fake sales law does not apply to cryptocurrencies, which makes them useful for tax collection.
Cryptocurrency investors have been on a wild ride over the past couple of years. From December 20, 2020 to December 19, 2021, the price of Bitcoin (BTC) increased by 93 percent and Ethereum by 495 percent.
But the good times are over in November 2021. Bitcoin and Ethereum both hit record highs earlier that month and have been falling sharply ever since. From December 19, 2021 to December 18, 2022, Bitcoin is down 67% and Ethereum is down 70%.
Considering this practice and the coin's current low market value, your clients who bought cryptocurrencies within the last two years and still hold positions may be experiencing undue losses on their investment portfolios. This is the time for cryptocurrency investors to review tax rules and strategies to see what they can gain from the cryptocurrency crash.
How does the IRS see the pros and cons of cryptocurrencies?
The IRS considers cryptocurrency an asset, so the same rules for short-term gains and losses or long-term gains and losses apply to the sale of cryptocurrencies as for other traditional capital assets, said Jesse Rodriguez of Kaufman Tax Advisory Group, Rosen. . In Miami.
"This depends on the length of the incarceration, and the tax rate is based on the taxpayer's adjusted gross income and filing status," Rodriguez explains. Short-term rates are taxed at ordinary income rates, long-term rates can be 15% or 20%, depending on the adjusted gross income for the year.
It added that 3.8% additional investment income tax may apply.
Charles Kolstad, a partner in the private client, tax and corporate groups at international law firm Weathers, adds a warning to active traders. "Most investors are not traders or traders, so they report all profits and losses in short-term (less than 12 months) or long-term (more than 12 months) profits or losses," he said. "Investors who trade regularly can qualify as traders when their profits and losses are normal profits or normal losses."
How to report cryptocurrency on your taxes
Tax forms for reporting crypto transactions should be familiar to stock investors. Taxes on cryptocurrency transactions are typically used to report sales and exchanges of capital assets on Form 1040 Schedule D and Form 8949, said Trevor English, vice president of marketing at Ledgable, a cryptocurrency tax and accounting platform.
Investors can receive a Form 1099-B from the exchange they work with and in the future a special digital asset Form 1099, originally called a Form 1099-DA, from the cryptocurrency exchange they trade.
Tax problems
However, according to Kolstad, investing in cryptocurrencies can increase filing complexity because the IRS pays close attention to possible tax evasion through the use of cryptocurrencies. For example, on the first page of Form 1040, it notes that taxpayers must respond to whether they made any crypto transactions for that tax year. Kolstad said taxing certain transactions could also be a challenge.
"Cryptocurrency is classified as an asset for tax purposes in the US, so every transaction involves converting fiat currency to currency such as US dollars, exchanging one cryptocurrency for another, exchanging cryptocurrency for NFTs (non-transferable tokens), selling cryptocurrency NFT, and converting all of cryptocurrency to fiat." They are taxable events," he explained. "Investors should monitor their tax base for US tax purposes to determine their taxable income in US dollars and not in cryptocurrencies, many investors are sitting on large losses, not tax deductible.
Rodriguez said tracking the tax base and calculating gains and losses from crypto transactions could mean a setback for stock investors who are used to receiving 1099-B forms from their stock companies. Some cryptocurrency exchanges may issue a Form 1099-B, but if crypto holdings are transferred between an offline storage ("cold wallet") and an exchange account, the report may not contain necessary payment information.
Additionally, cryptocurrency users often have accounts on multiple cryptocurrencies, and many self-help wallets store cryptocurrency and NFT holdings, Kolstad said. Transferring from one wallet to another is not a taxable event, but the tax base should be monitored for cryptocurrencies transferred across multiple wallets. This makes it difficult for frequent traders to determine the exact amount of taxable income.
This problem has spawned many cryptocurrency portfolio and tax reporting software applications that provide basic tracking, trading and portfolio reporting. These programs, such as Ledgible and CoinLedger, allow financial investors to link their accounts to the exchanges they use and their crypto wallets. Built-in tracking and reporting helps with tax return information.
"They do a good job summarizing the pros and cons, and we will definitely work with these platforms," Rodriguez said. "They're obviously a big part of the tax body."
The core reports may be updated in the near future to make tracking easier. According to Thomson Reuters and Ledgable, reporting requirements for cryptocurrencies under the November 2021 Infrastructure Investments and Jobs Act (PL 117-58) will take effect on January 1, 2023 and will affect the cryptocurrency industry in the United States. Keywords related to cryptocurrency include:
- The bill expands reporting requirements for financial transactions over $10,000 to include transactions involving digital assets.
- The law could affect the information companies collect and submit to the IRS in connection with cryptocurrency transactions. As the 1099 report moves into the digital asset space, more specific regulations may emerge from the SEC and IRS.
- The bill requires crypto exchanges to file Form 1099-B to report annual gains or losses on certain crypto assets. The new rules apply to returns issued after December 31, 2023, so disclosures issued in 2024 will apply to 2023 transactions.
Withdraw, earn, play and gamble
Some customers may have expanded their involvement in cryptocurrency beyond buying and selling. They can deal with the problem, earn money, mine or earn interest on their property. Transactions initiated on exchanges such as airdrops, dry forks and colored name soft forks may have tax implications for investors.