As with most investments, there will be taxes to consider before determining how much you’ve really earned – or lost – on your digital assets.
Before you can determine your tax obligations, you must first be clear about what is considered a taxable event with respect to buying and selling crypto.
But what do you do with your crypto after your first purchase, it may be a taxable event.
Using crypto to pay for things: In the United States, you can use cryptocurrency to purchase products or services. But it is not treated as cash for tax purposes. Instead, it is considered a property.
To make matters more confusing, using crypto to buy something technically counts as selling your crypto. You must therefore declare any capital gain or loss on this sale, which will be determined by the difference – in US dollars – between the amount 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 has appreciated in value, your capital gain will be taxed as ordinary income. If you hold it for more than a year, then it will be subject to capital gains tax rates.
If it has lost value, you can use that capital loss to offset any capital gains you have made on other investments.
Will my state tax my crypto transactions?
Don’t forget state taxes.
“Most states haven’t specifically addressed virtual currency, which means the majority of states that have income tax would follow the federal lead,” Luscombe said.
Any money you earn from your crypto investments or income payments will count towards your adjusted federal gross income. And most states use your federal AGI as a starting point.
Two states – Nevada and Wyoming, neither of which has income tax – specified they would not subject virtual currency transactions to state property tax, Luscombe said.
New reporting requirements at your fingertips
But from the tax year 2023, everything of your potentially taxable digital asset transactions will be reported to the agency by third parties.
This is no different from third party reporting requirements that are in place when you are employed or invest in stocks. You and the IRS get a W-2 a form from your employer that reports your annual income and a Form 1099 from your broker that reports your stock trades.
You can’t stay anonymous
The new reporting requirements represent a potential benefit for crypto investors in two ways: they are a sign that crypto is here to stay. And given the headache of trying to keep track of all your transactions, getting a 1099 can prove useful.
But the downside will be a loss of anonymity for those who want to keep their transactions private or who haven’t met their tax obligations.
But when setting up crypto-related accounts, the information you’re asked to provide varies by platform.
“Until this year, it was quite common to open [an account or digital wallet] with a name and email address,” said Erin Fennimore, information reporting manager at TaxBit, a cryptocurrency tax software provider.
In 2023, this will change in many cases. “You’re going to be asked for personal information that you probably haven’t been asked for in the past,” Fennimore said.
And the platforms required to report your transactions will have to verify your identity.
Additionally, when a digital asset is transferred from one broker to another, the transferring broker will need to issue a statement to the receiving broker that includes information about the basis and holding period of the transfer. crypto so that the receiving broker can meet their 1099 reporting requirements.
#Making #money #crypto #IRS #expects #reduction