If you bought cryptocurrency last year, you might be in for a shock this tax season.
Your cryptocurrency holdings, including Bitcoin, Ethereum, and others, are taxed. Since the IRS views cryptocurrency holdings as “property” for taxation purposes, your virtual currency will be taxed similarly to any other assets you may own, such as stocks or gold. The deadline for submitting your 2021 taxes or requesting an extension was April 18. In the event that you asked for a delay, you have until October 17, 2022, to file.
The year 2021 was a significant one for cryptocurrencies, as many new investors began to invest. According to a recent analysis by Grayscale Investments, more than half of existing Bitcoin investors started investing over the past 12 months. Throughout the year, the cryptocurrency market experienced numerous record highs and lows, which resulted in significant gains and losses for many investors.
Crypto Tax Girl creator and certified public accountant Laura Walter says, “Crypto accomplished some great things in 2021, and then there are a lot of folks that have gotten into crypto in the last 12 to 24 months, so it might be their first time paying crypto taxes.”
Most people who purchase and sell cryptocurrency through online exchanges find that including it in their tax returns is not too difficult. The more active you are, though, the more difficult things can become, similar to the majority of digital currency-related issues. What you need to know about whatever activities you might have to record to the IRS and how to start preparing for your 2021 taxes are provided below.
Buying Bitcoin using Dollars
You don’t automatically owe taxes on virtual currency just because you buy it with U.S. dollars, retain it on the exchange where you made the purchase, or transfer it to your personal wallet. According to the instructions on your Form 1040 tax return, you don’t have to submit that to the IRS if your only crypto-related activity this year was buying a digital currency with cash.
As soon as you start exchanging using cryptocurrency, things start to be taxed. This includes exchanging your cryptocurrency for dollars, purchasing another cryptocurrency, such as Ethereum with Bitcoin, or making purchases using cryptocurrencies.
A taxable transaction occurs if you sell an investment or exchange it for another one, according to Daniel Johnson, a financial counselor and the founder of RE|Focus Financial Planning in Asheville, North Carolina. If you trade frequently, you must exercise caution. Every every time you place that trade, if you are trading various cryptocurrencies in and out is a taxable event.
This year, the IRS is paying closer attention to bitcoin transactions and pursuing anyone found to be evading taxes, according to Walter. This year “may not be the year you’ll get away with it” if you’ve previously neglected to disclose your cryptocurrency on your taxes, she warns.
Now that the IRS is requiring more tax forms and reporting, Walter says, “I’m anticipating more audits.”
Trading or NFT Minting
Whether it’s a digital sports collectible or an animated flying cat with a Pop-Tart body, a non-fungible token, or NFT, it is a token produced on a blockchain that demonstrates you are the only owner of that one-of-a-kind digital item. NFTs are available for purchase and sale on online markets like OpenSea and SuperRare. They are taxed, just like cryptocurrency.
But because the IRS hasn’t provided any specific tax guidance on NFTs, navigating through it can be a little difficult. The particular tax ramifications of a given NFT rely on two factors, including whether you’re an NFT developer or investor and how much you interact with NFTs, says Shehan Chandrasekera, CPA and head of tax strategy at CoinTracker.io, a cryptocurrency tax software startup (i.e. as a hobby or a business).
Knowing what events are taxable and how they are taxed is crucial if you are producing or minting NFTs. An NFT minting charge, for instance, is a taxable event. Let’s say you mint NFTs for fun at a cost of 0.1 Ethereum each. If you paid $100 for this Ethereum initially, and it was worth $300 when you issued the NFT, then you would have made a $200 capital gain on the transaction.
Depending on how long you kept the Ethereum before using it to mint the NFT, you would be subject to either a long-term or short-term capital gains tax rate. However, the $100 would be considered typical revenue if you were a professional creator who frequently produced NFTs for your company.
According to Chandrasekera, “If you’re a hobbyist, you record revenue, but you cannot deduct any business-related expenses.” “Business-related expenses are deductible if you are producing NFTs for profit.”
Another taxable event is triggered once you exchange or sell that NFT for cryptocurrency. Since you are making (or losing) money from selling the NFT you produced, it would be taxed as income. You would be required to pay taxes on any royalties you receive for an NFT you developed.
If you are interested in more articles like this, here’s one about how much crypto is taxed in the USA.