As the saying goes, nothing is certain but death and taxes, and as for the taxes part, crypto is no exception.
Cryptocurrencies are not backed by a government or a central bank like the Federal Reserve but that doesn’t mean you can keep all the money you’ve made without paying taxes.
Whether you bought crypto and sold it and made a profit, used crypto to buy goods or services or paid people in crypto, there are tax implications for most scenarios and depending on your situation, it can be pretty confusing.
“I think it’s confusing to a lot of people, especially the people in the IRS. They do not know how crypto works,” Carolina Martinez, a crypto accountant Be Pro Accounting said.
Martinez says it’s confusing because there is a lot of gray area when it comes to how taxes are classified.
How does the IRS classify cryptocurrency?
The Internal Revenue Service issued its first guidance on cryptocurrencies in 2014 and since 2020 there’s been a yes or no question about crypto on the first page of Form 1040.
“The government has realized how many people are involved, how much money is being made and they want to collect taxes. And so they have made a much more concerted effort to bring clarity on the subject, although there is still a lot of gray area,” Alex Cruzet, founder of BitBookkeers.com said.
For federal tax purposes, cryptocurrencies are treated as property and similarly to stocks, capital gains and losses are taxed. For 2021, the first page of Form 1040 asks: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
Crypto tax experts say most people involved in crypto currencies will have to answer yes.
“Basically, you have to say no when you buy it and you hold it and you have to say yes when you do other transactions, like trading,” Martinez said.
“The same way you would be taxed if you were making money on the stock market, it’s the same concept. It’s treated as property and you need to declare any gains or losses,” Cruzet said.
Capital gains may be short-term or long-term, depending on how long you held the crypto before selling or exchanging it.
If you hold it for more than a year, that is long-term; less than a year is short term. Long-term gains are typically taxed at lower rates than short-term gains and ordinary income, from 0% to 20%, depending on your taxable income.
How to navigate the “gray areas” of tax and crypto
“If you’re lending out your crypto, you’re going to have to report on your Schedule B as interest income,” Cruzet said. “So there are other schedules that are required other than the Schedule D, where you report capital gains for trading.”
If you paid someone for goods or services with crypto or you made more than $600 in crypto from providing goods or services throughout the year, that is something you will have to report.
“That is based off of the value that you transacted at that particular moment,” Cruzet said. “So if you paid somebody the equivalent of $600 of Bitcoin then you would meet the threshold. So it’s not like I paid somebody x amount of Bitcoin today and tomorrow it’s worth a lot more. That’s for them to take care of if they ever sell it, that would be a capital gain for that.”
If you earned crypto from mining it, it’s considered taxable income and might be reported on Form 1099-NEC just as if it were self-employment income. You need to report this taxable income, even if you do not receive a 1099.
“The IRS has a three year look back period, but there is no statute of limitations on fraud. And so it behooves any individual who is making money and transacting in cryptocurrencies, to be honest and forthright, to avoid any legal and financial trouble,” Cruzet said.
What happens if you do not report taxable crypto transactions?
You can usually download a transaction report from your cryptocurrency exchange platforms. If you are on several exchanges, you’ll need to download them all and taxes can get really complicated depending on how much you traded or exchanged, so consult a tax preparer who has experience with cryptocurrencies so you’re protected in the case of an audit.
If you fail to report your crypto transactions or you misrepresent what you have, you could face stiff penalties and fines.
“They can trace your transactions, but a lot of times they cannot see exactly the whole picture,” Martinez said. “So they can say that everything is income. We have seen anything from $25,000 to $250,000 (in taxes and fines) because it depends on how much you hold and your financial situation and how long you failed to report your crypto transactions.”
This news is republished from another source. You can check the original article here