© Provided by CNBCIf you invested in crypto last year, the US government wants a share.
The IRS is taking virtual currency transaction tracking more seriously and in fiscal year 2022 asks taxpayers directly if they received or sold digital assets during the tax year. .
If you have bought or sold cryptocurrencies, here are three things to keep in mind when it comes to taxation.
1. Cryptocurrency can be taxed
One of the biggest misconceptions of cryptocurrency investors is that their cryptocurrency cannot or will not be taxed, Make It reported to CNBC.
But it could be. Since 2014, the IRS has had jurisdiction over virtual currency for federal income tax purposes, according to the agency's website.
Like stocks, cryptocurrencies are subject to IRS rules regarding capital gains and losses. This means that if you made a profit by selling your cryptocurrency for more than you bought it, you will have to pay capital gains tax on the difference.
Let's say you bought $500 worth of cryptocurrency and sold it for $600. The $100 difference will be considered capital gains and subject to capital gains tax, which is usually taxed at a lower rate than ordinary income.
If you sell your cryptocurrency for less than what you paid for it, this will be considered a loss of capital. The IRS allows investors to use capital losses to offset taxable profits. In addition, capital losses can be used to reduce your ordinary income by up to $3,000 per year if your capital losses exceed your capital income for the year.
Other taxable events include when you used crypto to buy a product like coffee or if you were paid to work in crypto, Chandraseker said. However, you usually do not pay tax if you only buy crypto with fiat currency such as dollars, transfer your crypto from one virtual wallet to another, or receive crypto as a gift.
2. Your crypto activity is not completely invisible to the IRS
Another misconception among cryptocurrency investors, Chandraseker said, is that the IRS cannot see your cryptocurrency trading activity and therefore is not required to report it at tax time.
While cryptocurrencies are considered anonymous, regulators have several ways to link their virtual activities to the real world.
If you trade on centralized exchanges such as Coinbase or Gemini, those exchanges must report to the IRS. Typically, they send you a separate 1099 form detailing the income you received from crypto transactions on their platform, Chandrasekera explained.
Coinbase, for example, sends this form to customers who have earned over $600 in crypto, according to its website. However, you must still report your income to the IRS even if you made less than $600, the company said.
The IRS can also monitor your cryptocurrency activity when you apply for virtual trading platforms, Chandraseker said. He says the documents companies send to the government can contain thousands of names, so the IRS can check to see if you've reported your business activities to the government.
And remember, even if you don’t use a major platform and don’t think the government can track your crypto transactions, you still have to report income, gains or losses on all tax-related crypto transactions according to the IRS. Web site
3. Good accounting is essential
“The biggest mistake people make with cryptocurrencies is not keeping an accurate record of their transactions,” said Douglas Bonpart, a certified financial planner, president and founder of Bone Fide Wealth and a member of the CNBC Council of Financial Advisers.
In most cases, investors are responsible for reporting their cryptocurrency investments or income at the time of taxation. This means you have to keep track of every purchase or sale and the exact details of those transactions, Bounpart explained.
Chandrasekera says that tools like Cointracker can help you track crypto transactions and automatically generate the necessary tax forms.
Also, if you need more time to consolidate your crypto business, you have the option to extend the application period from April 18 to October 16 this year. But be aware that if you owe money to the government, you have until April 18 to pay it off, according to the IRS website.
More information on how the IRS taxes cryptocurrencies can be found on the agency's website.
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