Understand Paying Crypto Taxes

#crypto #cryptocurrency #virtual #digital #asses #Bitcoin #Ethereum #IRS #taxes

“Failing to properly report and pay taxes on cryptocurrency holdings may have gone unnoticed in years past, but experts say those days are over.”— Paul Ebeling

The Internal Revenue Service has signaled its efforts to not only enforce the tax code in the world of virtual currency, but to target cryptocurrency owners seen by the agency as low-hanging fruit. These efforts began around Y 2014 and have escalated as legislators, too, have turned their focus on the increasingly popular cryptocurrency assets, exchanges and lending.

In Y 2019, the IRS sent letters to virtual currency owners urging them to amend past returns and pay back taxes. The same yr, the IRS began information gathering by including a question on tax returns asking whether taxpayers own cryptocurrency assets.

The Y 2020 IRS Form 1040 explicitly asked if taxpayers “received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency.”

Bruce WD Barren, our resident US tax expert says that there is no excuse for failing to report crypto earnings and income.

At this point everyone is aware of it. And not hiding, Oh, I didn’t know I needed to report that anymore If they do not and the IRS finds out about it, which they will, there will interest penalties, and depending on how extreme it is, possible jail time. You do not want to play that Russian roulette. As it only stands to worsen as the IRS adds more virtual currency experts to its staff and receives more funding. if you have crypto currency, the best alternative is to borrow against it to buy additional assets, whether it be more crypto or not. That way at least one can defer their taxes and yet get the benefit of additional borrowing power.

The Infrastructure Investment and Jobs Act, which Nicholas Anthony of the Cato Institute called “the beginning of an attack on the cryptocurrency industry,” added new levels of complexity for cryptocurrency traders and miners when it was signed into law in Y 2021. With more legislation addressing crypto assets likely to follow in the coming yrs, the time to get a handle on what your crypto activity means for your taxes is now.

Virtual currency is taxed like any other property for federal income tax purposes, meaning the tax principles that apply to assets like stocks and bonds also generally apply to Bitcoin, Ethereum and other cryptocurrencies.

If you sell cryptocurrency, you must recognize any capital gain or loss. It is more costly from a tax perspective to trade cryptocurrency frequently and quickly because virtual assets are subject to short-term and long-term capital gains taxes.

Mr. Barren says, “The IRS is trying to get to a point where it is like any asset. If you trade in crypto, it’s no different from any of those stocks or assets in their mind. Depending on how long you hold it, you should pay some sort of taxes on that gain. If you sold your crypto after holding it for more than a year, the gains are taxed separately from your ordinary income at the long-term capital gains rate. Depending on your income and filing status, these are currently taxed at 0, 15, or 20%”

You may also incur a tax liability from sending or exchanging cryptocurrency, which can occur in many ways.

Mr. Barren notes that there are many different ways of gifting crypto. My personal one is sending crypto from 1 wallet to another. There are also gift cards available that you can purchase, mainly for the bigger known crypto assets like Bitcoin and Ethereum.

If that gift of cryptocurrency, regardless of how it was transferred, has a fair market value of more than $15,000, you must complete Form 709, a gift tax return.

However, simply buying cryptocurrency with real currency is not a taxable event, so long as that cryptocurrency is not received as a gift, sold, given as a gift or exchanged.

Have a prosperous week, Keep the Faith!