PThe pros have one major piece of advice for those who traded cryptocurrency for the first time last year: take your tax preparation seriously.
The IRS has focused on cryptocurrency reporting with increasing interest in recent years. And the last thing you want is to waste time and money reconciling your tax debt, says Douglas Boneparth, a New York-based certified financial planner.
With tax season in full swing, here’s a quick guide to what cryptocurrency activity should be reportedhow it is generally taxed and the best ways to prepare.
What you need to report to the IRS
The IRS treats virtual currencies as property, meaning they are taxed the same as stocks. If all you did was buy cryptocurrency with US dollars, and those assets remained intact on an exchange or in your cryptocurrency wallet, you shouldn’t have to worry about reporting to the IRS this year.
Reporting is required when certain events come into play, most commonly:
- Exchanging one cryptocurrency for another.
- Selling cryptocurrency for fiat dollars (currency issued by the government).
- Using cryptocurrency to buy goods or services (for example, paying for a cup of coffee with cryptocurrency).
A key distinction to make is that triggering a taxable event doesn’t necessarily mean you’ll have to pay taxes, says Andrew Gordon, an Illinois-based accountant and tax attorney. Just because you have to report a transaction doesn’t mean you’ll be liable to the IRS.
How Cryptocurrency Is Taxed
Whenever you sell an asset for profit, the resulting gain may be subject to taxation of capital gains. To determine your exact gain or loss, you will need the date you acquired the cryptocurrency; the date you sold, traded or otherwise transferred it; and the cost basis (the amount you paid plus transaction fees).
Gains are then taxed at either the short-term or long-term rate, depending on how long you’ve held the asset. Short-term gains for assets held less than one year are taxed as ordinary income, while long-term gains for assets held longer than one year are generally taxed at 0%, 15% or 20%, depending on your taxable income and filing status. .
For example, suppose you bought $2,000 of a cryptocurrency in January 2021 and sold it two months later for $5,000. This $3,000 capital gain would be subject to the short-term capital gains rate.
Once you have calculated your gains and losses on Form 8949, you will need to report them on Schedule D of Form 1040.
How to prepare
1. Be honest
If you omit information about your taxes, you risk penalties, fees and, in serious cases, even tax evasion charges. And with the revision to Form 1040, which now includes a direct yes or no question to find out whether you received, sold, traded, or transferred cryptocurrency, the IRS is signaling that those who do not report will not be able to fake the ‘ignoring. , said Gordon.
2. Get your files in order
Cryptocurrency exchanges will not be required to send taxpayers Form 1099-Bs, also known as tax return summaries, until the 2023 tax year, so it is incumbent on traders to keep accurate records. of their transactions. Many exchanges, such as Coinbase, allow you to upload your trading history, which can make calculating gains and losses easier for you, tax software, or a tax preparer. If you’ve traded off-exchange, you may need to set aside a bit more time to dig in.
3. Consider using tracking tools
Reporting a single trade on an exchange probably won’t be difficult. But a “typical taxpayer has three to five wallets and exchanges,” according to Shehan Chandrasekera, CPA and head of tax strategy for CoinTracker. This makes it more difficult to reconcile the cost base between different platforms. If you are an active trader, it may be a good idea to invest in software that can help you track your trades.
4. Hire a professional
If your tax situation is complex, consider working with an expert cryptocurrency tax professional. They can guide you through the different accounting strategies the IRS allows for reconciling your gains and losses, and help you determine which one is best for you.
5. Make losses work in your favor
If you didn’t take advantage of tax reduction strategies last year, such as tax-loss harvest, a donation, or a donation — but if you make a loss, you always have the option of lowering your tax bill. Just like with stocks, if you sold currency for less than you paid, you may be able to deduct up to $3,000 of those losses on your taxes.
This article was written by NerdWallet and was originally published by The Associated Press.
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The article Traded Cryptocurrency in 2021? Here’s how to approach taxes originally appeared on NerdWallet.
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