Chapter 09
Find A Tax Attorney That Specializes in Cryptocurrency
Keeping excellent records when you buy or sell cryptocurrency is more important than ever before, even if hundreds of transactions are made throughout the year.
Did you purchase or sell cryptocurrency such as Bitcoin or Ethereum last year? If so, you should report any profits on your tax return this year. The same can be said for non-fungible tokens.
Virtual currencies are considered to be property, so the IRS considers their taxable value to be based on gains or losses during a given period of time.
The tax rates are different too, such as the rate for a short-term capital gain, which will depend on how long an asset is held.
It's also important to know that the FATF (Financial Action Task Force) travel rule, a regulation which came into effect June 2021, captures nearly every wallet owner on a public chain. This rule requires Crypto companies — also known as Virtual Asset Service Providers — to collect personal information on participants in transactions that exceed $1,000 USD.
Gone are the days when you could avoid paying virtual currency taxes.
If you have not kept records, paid taxes or reported income from your cryptocurrencies trades, there's a better-than-average chance that you will get a letter from the IRS.
Should it come to that, consulting with a crypto tax attorney would be a really good idea.
Federal Taxes
For Investors who buy and sell cryptocurrency for profit:
- Tax is paid on cryptocurrency profits.
- Digital currency is treated the same way as property by the IRS.
- Tax is paid on the capital gains – the difference between the price paid for the coin and the amount that it is sold for.
There are two different rates depending on the amount of time that the currency was owned.
If it was owned for less than one year, the short-term rate applies. This percentage will be the same amount as you are taxed on your income.
For cryptocurrency held longer than one year, the rate is 15% or 20%.
For workers who are paid in cryptocurrency or make a living mining new currency:
- Cryptocurrency income is taxed as just that – income.
- You should declare the value in USD.
What is Not Taxed
Cryptocurrency that is simply held in an account is not taxed until a profit is made. Therefore, it only needs to be declared once it is sold or an income is received.
Reporting Profits to the IRS
You should keep excellent records when you buy or sell cryptocurrency.The IRS will need to know the date, the purchase price, the sale price and the amount made or lost.
This is the case even if hundreds of transactions are made throughout the year. It is not enough to give a monthly profit or loss total; every transaction should be noted.
Investors should utilize Form 1099 to complete the necessary information.
Some brokers will supply the form for you, although it is always better to still create your own records to ensure that all the information is accurate.
Several traditional tax software programs have been updated so that they now allow for cryptocurrency to be included, taking care of the relevant calculations for you.
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Steps to Lower Your Tax Bill
- Holding onto virtual currency long-term.
- Offsetting gains with losses.
- Sell your virtual currency at a loss.
- Claiming data mining expenses.
- Knowing your cost basis.
- Timing transactions with your tax rates.
- Donating virtual currency to charity.
- Work with a tax attorney who specializes in cryptocurrency
Ten Years From Now
In the early days of cryptocurrency, investing in digital coins was seen by many as a ‘get rich quick’ scheme. And it's true — for those people who mined coins early on and managed to sell at peak popularity, there was a lot of money to be made.
If you had purchased one Bitcoin in 2013, you would have paid $164. Almost 10 years later, the value of that same, single Bitcoin is $33,863. But, it is a fact that Bitcoin's value has fluctuated widely from $20,000 per Bitcoin in 2018 to only $4,000 the end of 2019.
Where does Bitcoin go from here? Some experts say it will continue to skyrocket in value. Shark Tank's Kevin O'Leary has been quoted as saying, “It's a giant nothing-burger.” Doomed, in other words.
As long as gains are made, they will continue to be taxed in the same way as physical property. It has never been the case that cryptocurrency was a mode or method to avoid the IRS being able to see what’s going on with people’s finances.
The year 2021 was a pivotal one for cryptocurrency. Those working in the civil and criminal tax arenas have made gains from digital assets on their radar. This is only set to increase over the coming years. Confusion or lack of transparency is no longer a valid excuse for getting things wrong.
Working with an expert tax attorney who specializes in cryptocurrency is the best way to get specific advice for your personal situation - whether the amount of cryptocurrency you own is a little or a lot, or you’ve just dipped your toe into the virtual pool.
Thank you in advance for reading “The Ultimate Guide to Bitcoin, NFTs and Virtual Currency Taxation.” It was a labor of love and our law firm welcomes all questions, comments, concerns, and feedback that you may have about this free resource.
