Crypto-currency is hot right now—and yes. It is definitely taxable this 2022 tax season.
The IRS considers cryptocurrencies like Bitcoin, Ethereum and other forms to be “property” for tax purposes, which means your virtual currency is taxed in the same way as other assets you may own, like stocks or gold.
“This year, the IRS is putting a lot of agents in surveillance mode for the agency,” says Rock&Hammer Partner Daniel Portillo. “The IRS has increased the number of its agents auditing personal tax returns, so it’s important to report all gains or losses related to virtual currencies.”
2021 was a big year for crypto, with many new investors buying in for the first time by trading crypto within online exchanges. The crypto market hit multiple all-time highs and lows throughout the year, Portillo says, and it has led to large gains and losses for many investors, so it’s critical to be sure you’re reporting it all correctly on your 2021 and 2022 tax filings.
Simply buying virtual currency with U.S. dollars and keeping it within the exchange where you made the purchase or transferring it to your personal wallet does not necessarily mean you’ll owe taxes on it — but things can get complicated whenever you sell the investment, or exchange it for another investment, Portillo says, because that’s when a taxable transaction occurs.
“You’ve got to be careful if you’re doing a lot of trading,” Portillo says. And to be sure, he adds, “if you have a tax return with unreported income, you can be vulnerable to high penalties or tax evasion charges and, possibly, criminal penalties.”
A few tips to consider:
- Non-fungible tokens, or NFTs, are also taxed. Let’s say you ‘re a hobbyist and you make NFTs for fun and spend .01 Ethereum to mint an NFT. If you originally purchased this Ethereum for $100 and it’s worth $300 at the time you minted the NFT, then the transaction would generate a $200 capital gain for you, and you’d be subjected to either a long-term or short-term capital gains tax rate, depending on how long you held the Ethereum before using it to mint the NFT. But, if you are a professional creator who frequently minted NFTs for your business, the gains would be treated as ordinary income.
- Capital gains and losses. The difference between the amount you spend when you bought or received the crypto and the amount you earn from its sale is the capital gain or capital loss—what you’ll report on your tax return.
- Track your activity. One of the most important things to remember when you start dealing in cryto-currency is that it’s your responsibility to keep track of all of your potentially taxable activities, as well as the fair market value of your crypto through those currencies. “Getting into crytpo can be very exciting and simple,” says Portillo. But actually tracking the cost basis “and making sure you’re doing it correctly, that’s where it can get complicated,” he says. “We can help you sort it out.”
Leave a Reply