4 myths about crypto taxes you should know
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• The IRS treats cryptocurrency as “property”. If you buy, sell, or exchange this virtual currency, you will most likely need to pay crypto taxes.
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• You can also impose a tax liability on crypto activity by earning it as income or using it as currency for your purchases.
• Other actions that may generate a taxable event include crypto mining, airdrops, storage rewards, and crypto-to-crypto exchanges (including non-fungible tokens, or NFTs).
• Depending on the type of activity, you will report cryptocurrency gains and losses on Form 1040 Schedule D, or crypto income on either Form 1040 Schedule C Self Employment Earnings or Form 1040 Line 1 as Employment Wages.
How is cryptocurrency tax treated?
The IRS ruled that cryptocurrencies are “property” in IRS Notice 2014-21, giving virtual currencies the same treatment as stocks, bonds, or gold. This means that if you trade cryptocurrency in a taxable account or earn income from activities such as betting or mining, you have taxable events to report your return.
If you sold or exchanged cryptocurrency during the tax year, you will likely need to report this activity on Form 1040 Schedule D and Form 8949 if necessary. If you earned cryptocurrency from working as a freelancer, contractor, or gig worker and were paid in cryptocurrency or for crypto-related activities, you may need to report this on Schedule C and pay taxes on your crypto earnings.
Below, we cover some common myths about cryptocurrency taxes and clear up many of the misconceptions people may have.
Crypto tax myth #1: Cryptography is not taxable
Crypto activity is taxable and must be reported to the IRS in most cases. If you sell or exchange one cryptocurrency (including one cryptocurrency for another), this creates a taxable event that you will need to report on your tax return as a capital gain or loss.
Likewise, if you win cryptocurrency for work you’ve done or as a promotion related to activities like betting, those transactions are taxed as ordinary income.
The IRS has chosen to ramp up tax enforcement of cryptocurrency by placing a question at the top of Form 1040 asking, “At any time during 2021, did you receive, sell, send, exchange, or acquire any financial interest in any virtual currency?”
By adding this simple question, the IRS removed any doubt about whether cryptocurrency activity is taxable. The broker or exchange may not provide you with a Form 1099 to report this activity, but you are still obligated to report it. If you received a Form 1099 from the broker or exchange, and the information provided is incorrect, you must provide the correct details on your tax return through Schedule D and Form 8949.
If you only purchased cryptocurrency during the tax year and did not make any other transactions with it, you do not need to report this activity. Just like buying and holding stocks and bonds in your investment account, you do not need to report this information to the IRS on your tax return if it is not accompanied by a subsequent sale or exchange. In the year of disposal, you will need to provide details regarding the sales price, cost basis and retention period.
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TurboTax Tip: The U.S. Infrastructure Act of 2021 makes cryptocurrency exchanges required to submit 1099-B forms beginning in tax year 2023. Until then, if you haven’t received Form 1099-B from a cryptocurrency exchange, you must still report all crypto sales or Trade-ins on your taxes.
Crypto Tax Myth #2 – The blockchain is completely anonymous and the IRS cannot track your crypto transaction activity.
Crypto is promoted as a secure, decentralized and anonymous form of currency. While this is true in many respects, the IRS can keep track of your cryptocurrency wallets and the activity around them.
The blockchain is the public ledger where all transactions are recorded and verified in a decentralized manner through various means. As a result, all transactions are in the public domain. This general transparency allows the IRS to associate wallets with specific people, despite the appearance of anonymity. When registering for a wallet, you must follow the Know Your Customer (KYC) rules, which associate your identity with a specific wallet. Exchanges and brokers must also collect this information, and submit it to the IRS for reporting purposes.
If you trade on an existing exchange that complies with Know Your Customer (KYC) protocols, the IRS can track and link your transactions with you. In short, the IRS can use blockchain analytics tools to determine your crypto activity. Therefore, you will need to make sure that all of your crypto transactions are reported on your tax return.
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Crypto Tax Myth #3 – You only owe taxes to the IRS if you received a Form 1099-B.
Not every source of income may be documented on an appropriate IRS form by your employer or clients. As you gather your documents and prepare your tax checklist items, don’t forget that you still need to report them on your tax return.
Employers are required to send you a Form W-2 if they paid you $600 or more during the tax year (or if they withheld Social Security, Medicare, or income taxes from your paycheck, regardless of how much wages were paid). Likewise, if you earned more than $600 working as a freelancer, independent contractor, or gig worker for a client, in general, a 1099-NEC must send you to report your earnings. If trading on a crypto exchange, you may not receive any 1099-B forms reporting your activity. This is because, until tax year 2023, cryptocurrency exchanges are not required to report your trading information to the IRS via Form 1099-B.
Regardless, if you have placed trades on a crypto exchange that resulted in capital gains or losses, you will need to report this activity to the IRS. Normally, you should be able to download your transaction activity from the exchange and use it to prepare your Schedule D for tax reporting purposes.
Myth 4 About Crypto Taxes – If you hold your cryptocurrency through a private wallet rather than a cryptocurrency exchange, you don’t need to report crypto gains or losses on your tax return.
You still face the same tax rules on a private wallet or public cryptocurrency exchange. If you make trades that result in capital gains or losses, you need to report your activity to the IRS regardless of how the cryptocurrency is stored.
Private wallets do not necessarily obscure your trading activity because blockchains for cryptocurrency are publicly accessible and can be linked to individuals through the capabilities and methods of blockchain analytics by the IRS. You must report all cryptocurrency gains and losses on your tax return, regardless of whether they occurred on a crypto exchange or through a private wallet.
Changes under the US Infrastructure Act of 2021 require tax compliance reporting
The US Jobs and Investments in Infrastructure Act of 2021 contained several provisions directly related to crypto-asset information and reporting required of brokers. The law expanded the definition of “intermediary” to include anyone who transfers digital assets on behalf of another person.
As a result, brokers who help clients place crypto trades will need to start reporting this activity on the relevant crypto tax forms, i.e. Form 1099-B, starting in tax year 2023.
Until then, you still have to report all of your crypto activity on your tax return.
Report your encryption activity
Many myths about crypto taxes have led to the belief that crypto activity is not taxable, although the IRS made this clear by asking an important question on Form 1040. Whether it’s a cryptocurrency exchange, private wallet, broker, or other services you use for For your crypto activity, this information is reported to the IRS or not, you are still responsible for any capital gains or losses that result from it. Make sure all of your crypto information is collected and reported accurately on your tax return each year.
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