Taxation on cryptocurrencies: here’s what you need to know

As with most investments, there are taxes to consider before determining how much you’ve really made — or lost — with your digital assets.

So if you couldn’t resist taking part in, say, bitcoin’s crazy dash – which, for those keeping the score, is over 50% below its all-time high – pay attention to the following.

Before you can determine your tax liabilities, you must first be clear about what is considered a taxable event when it comes to buying and selling crypto.

Purchase and possession: Simply buying and holding virtual currencies such as crypto is not taxable. And you don’t have to report the details of your tax return, according to the IRS, just as you wouldn’t report stock or other asset that you bought and hold in a brokerage account. (Although in this example you would report any dividends or interest on the investment.)

But what do you do with your crypto? after your first purchase, it can be a taxable event.

Using crypto to pay for things: In the United States, you can use cryptocurrency to purchase products or services. But it is not treated as cash for tax purposes. Instead, it is considered a property.

To make things even more confusing, using crypto to buy something technically counts as selling your crypto. You must therefore declare any capital gain or loss on this sale, which is determined by the difference – in US dollars – between the amount you paid for the currency and its value when you used it to buy something.

If you held the crypto for a year or less and has increased in value, your capital gain is taxed as ordinary income. If you hold it for more than a year, it will be subject to capital gains tax rates.

If it’s lost value, you can use that capital loss to offset any capital gains you’ve made on other investments.

Get paid in crypto: If you are paid in bitcoin or another digital currency, it will be treated as taxable income for you. The amount declared must be the fair market value in US dollars of the virtual currency on the day you received it.

Pay someone in virtual currency: This is treated as selling your currency on which you will realize a profit or loss. The IRS notes that the gain or loss is determined by the difference between the fair market value of the good or service you are purchasing and your adjusted basis in the virtual currency used in the transaction (ie. your original charges for the currency and any fees or commissions you paid for it). Here’s an oversimplified example: if you paid someone in bitcoin for a $1,000 plumbing job and bitcoin’s base cost was $500, you’d have a capital gain of $500 on which you owe taxes.

In all these cases, if you fail to pay the tax due, you will be liable to pay interest and penalties and, in certain circumstances, even criminal charges.

Will my state tax my crypto transactions?

Don’t forget the state taxes.

“Most states haven’t specifically talked about virtual currencies, meaning the majority of income-tax states would follow the federal lead,” Luscombe said.

Any money you make from your crypto investments or income payments counts toward your adjusted federal gross income. And most states use your federal AGI as a starting point.

Two states – Nevada and Wyoming, neither of which have income taxes – specified they wouldn’t subject virtual currency transactions to state property taxes, Luscombe said.

(For more information on these and other questions, the IRS created this FAQ. And if your situation is particularly complex, consult a tax professional with experience in this area.)

New reporting requirements at your fingertips

Currently, you are still responsible for keeping all records of your crypto transactions and reporting those that are taxable to the IRS. You will also be asked to confirm at the top of your Form 1040 whether you received, sold, shipped, bartered, or otherwise acquired a financial interest in virtual currency during the tax year.

But the IRS didn’t just take your word for it. For example, any company that pays more than $600 to a non-employee or pays a salary to an employee must report that income to the IRS, said Mark Luscombe, senior federal tax analyst for Wolters Kluwer Tax & Accounting. If you fail to report this income received, you could be subject to an audit and/or a fine for under-reporting.

But from the tax year 2023, all of your potentially taxable digital asset transactions are reported to the agency by third parties.

This is no different from the third-party reporting requirements that apply when you are employed or invested in stocks. You and the IRS get a W-2 a form from your employer that reports your annual income and a form 1099 from your broker that reports your stock transactions.

In an effort to make money laundering more difficult, next year, every time it receives more than $10,000 worth of cryptocurrency in a single transaction (or two or more), a company must report several related transactions to the IRS, just as it must. do when it receives money. above this threshold. If you intentionally fail to do so, it could be prosecuted as a federal misdemeanor.

You can’t stay anonymous

The new reporting requirements represent a potential benefit for crypto investors in two ways: they are a sign that crypto is here to stay. And given the headache of trying to keep track of all your transactions, you get a 1099 can prove useful.

But the flip side is a loss of anonymity for those who want to keep their transactions private or who have failed to meet their tax obligations.

When you open a bank or brokerage account, you have to provide a lot of personal information that is checked to confirm that you are who you say you are. You must provide, among other things, your legal name, address, telephone number and a social security number or other tax identification number.

But when setting up crypto-related accounts, the information you need to provide varies by platform.

“Until this year it was very common to open [an account or digital wallet] with a name and email address,” said Erin Fennimore, information reporting manager at TaxBit, a cryptocurrency tax software provider.

In 2023, this will change in many cases. “You will be asked for personal information that you probably have not been asked for in the past,” Fennimore said.

And the platforms that are supposed to report your transactions must verify your identity.

In addition, when a digital asset is transferred from one broker to another, the transferring broker must issue a statement to the receiving broker detailing the basis and retention period of the transfer. crypto so that the receiving broker can meet their 1099 reporting requirements.

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