Making money on crypto? Yes, the IRS expects a cut
As with most investments there will be taxes to consider before figuring out how much you really made — or lost — on your digital assets.
Before you can figure out your tax obligations, you first have to be clear on what is considered a taxable event when it comes to buying and selling crypto.
But what you do with your crypto after you first buy it may well be a taxable event.
Using crypto to pay for things: In the United States, you can use cryptocurrency to buy products or services. But it is not treated as cash for tax purposes. Instead it is considered property.
To make matters more confusing, using crypto to buy something technically counts as selling your crypto. So you must report any capital gain or loss on that sale, which will be determined by the difference — in US dollars — between how much 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 it appreciated in value, your capital gain will be taxed as ordinary income. If you held it longer than a year, then it would be subject to capital gains tax rates.
If it lost value, you may use that capital loss to offset any capital gains you incurred in other investments.
Will my state tax my crypto transactions?
Don’t forget about state taxes.
“Most states have not specifically addressed virtual currency, which means that the majority of states that have an income tax would follow the federal lead,” Luscombe said.
Any money you earn from your crypto investments or income payments will be factored into your federal adjusted gross income. And most states use your federal AGI as a starting point.
Two states — Nevada and Wyoming, neither of which have an income tax — have specified they would not subject virtual currency transactions to the state property tax, Luscombe said.
New reporting requirements on tap
But starting in tax year 2023, all of your potentially taxable digital asset transactions will be reported to the agency by outside parties.
It’s no different than the third-party reporting requirements that are in place when you hold a job or invest in stocks. You and the IRS get a W-2 form from your employer that reports your annual earnings and a Form 1099 from your broker that reports your stock transactions.
You can’t stay anonymous
The new reporting requirements represent a potential upside for crypto investors in two ways: They’re a sign that crypto is here to stay. And given the headache of trying to keep track of all your transactions, getting a 1099 may prove helpful.
But the downside will be a loss of anonymity for those who want to keep their transactions private, or who have not met their tax obligations.
But when you set up crypto-related accounts, the information you’re asked to give varies by platform.
“Until this year, it was pretty common you could open [an account or digital wallet] with a name and email,” said Erin Fennimore, head of information reporting at TaxBit, a cryptocurrency tax software provider.
Come 2023, that will change in many instances. “You’re going to be asked for personal information that you most likely have not been asked for in the past,” Fennimore said.
And the platforms required to report on your transactions will have to verify your identity.
In addition, when a digital asset is transferred from one broker to another, the transferring broker will have to issue a statement to the receiving broker that includes basis and holding period information on the transferred crypto so the receiving broker can satisfy its 1099 reporting requirements.
Quoted from Various Sources
Published for: Ipodifier