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.
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.