Crypto Tax Tips to Avoid IRS Trouble
Crypto investors documenting their taxes must know how to track cost basis, maintain good records of all original purchases and transactions, and report everything in U.S. dollar terms. This is all in addition to making decisions — oftentimes without IRS guidance — as to the taxability of certain gray-area transactions, due to the ever-evolving nature of the cryptocurrency ecosystem.
CryptoTrader.Tax (rebranding to CoinLedger), dispatched a review and distributed a report that saw that as practically 25% of crypto financial backers who didn’t report crypto on their government form said they didn’t know crypto was available. Another 20% said they didn’t have any idea how to report their crypto action.
Cryptographic money charge announcing programming can assist with guaranteeing financial backers keep away from IRS examination, which has developed more keen as of late as more individuals put resources into advanced resources. As you document the current year’s crypto charges, here are additionally three significant, sound judgment tips to assist you with keeping away from the IRS’ notice.
Exchanging your crypto for another crypto or for NFTs is a taxable event
The IRS considers crypto property, which means that if you sell or dispose of it for another digital asset, you have to report the transaction on your tax return. Trading one crypto for another is a disposal event, which is taxable and must be reported. One common misconception is that if you don’t trade crypto back to U.S. dollars, you do not owe taxes on any gain.
This rule covers exchanging any crypto, such as ETH, for a non-fungible token (NFT). NFTs are applicable to the same rules as cryptocurrency. Note when you purchase an NFT, you do this most of the time by disposing of your ETH or another crypto. When this occurs you have taxable gain or loss on that ETH or other crypto that you’ve used to make the NFT purchase.
If you earned income from crypto and then later sold, you have two different taxable events
There are a wide range of ways of procuring crypto, including mining, airdrops, marking your coins or through acquiring interest. At the point when you procure crypto thusly, you have normal pay to report. The sum you report is the honest evaluation of the crypto you procured when you got it. You ought to report this pay on your assessment form on Schedule 1, as “Other Income.” From there, assuming you choose to sell your acquired coins, you will have a capital increase or misfortune, contingent upon how the cost of your crypto has changed from when you procured it.
You won’t end up paying taxes on the same income twice. The income you report on your tax return from earning the coins becomes your cost basis in those coins — which reduces the amount of tax you pay when you eventually sell.
Know when to mark ‘yes’ to the front-page question about virtual currency
At the beginning of the tax return, front and center, there’s a question of whether you engaged in any transaction involving virtual currency. If you received crypto, exchanged your crypto, or disposed of your crypto in 2021, you must answer yes.
If your crypto activity was limited to strictly purchasing crypto, holding crypto, or moving crypto from one wallet or account to another that you own or control, you can answer no to the question.
Investing and transacting with cryptocurrencies comes with the responsibility of reporting your taxable crypto transactions on your return. And although crypto taxes can be complex, the tools available can make the process easier.