Tax Day is just around the corner – April 18th to be exact, and for many people and businesses this will be their first-time filing taxes on their digital assets, like NFTs and cryptocurrency. In fact, a study by GrayScale Investments found that “more than half (55%) of investors who currently hold bitcoin began investing over the last 12 months.” Doing taxes is a tedious process and adding digital assets into the mix seems like it would only make things more confusing. But, the truth is that paying taxes on your digital assets doesn’t have to be difficult.
The most important thing that you’ll want to know is that the Internal Revenue Service (IRS) taxes your crypto assets as “property” and will tax them in the same way as other assets that you own such as gold and stocks.
Calculating Capital Gains and Losses
This past year was big for crypto concurrent with some large ups and downs in the market. If your only action was purchasing crypto and holding it in your wallet this year, then you won’t have to report anything since this is not considered a taxable event by the IRS. However, if you traded, exchanged, or purchased goods with crypto this year then this is where things become slightly more complicated, and you’ll have to account for the capital gains and losses.
Capital gains and losses are when you calculate the difference between the amount you spent when you bought or received the crypto and the amount that it was sold for. For example, if you purchased $500 dollars’ worth of bitcoin and traded it for $700, then you would have $200 in capital gains. If you purchased $500 of crypto and traded it for $300, then you would have $200 in capital losses.
Reporting Your Crypto Income
Some people received virtual currency as payment for their services this year. For them, they will have to record the fair market value of the crypto at the point at which they received it. For example, if you were paid one Bitcoin last year and Bitcoin is at $30,000 dollars, then you would report $30,000 of taxable income to the IRS.
This fair market value then follows the coin, so if you use that coin to purchase goods and services then you will need to reconcile the difference with what it is currently valued at.
Some Crypto Planning Tips
One of the most important things that we can emphasize is that each person is responsible for tracking all of their crypto transactions as well as recording the fair market value of the crypto throughout your taxable activities. The best way to do this is by keeping an excellently organized wallet. The first step is to separate your wallets by responsibility and how they are being used. The second step is to keep track of the addresses that you interact with on a frequent basis. If you send money to people, or people send money to you, you’ll want to keep track of that.
It’s also important to note that this should regularly be attended to throughout the year. You don’t want to run into a situation where tax season is quickly approaching and there are no records of your crypto transactions. This also means tax payers should start early- don’t wait until April to begin gathering all your necessary documents and reporting for tax season.
The final point that we can emphasize is to have early and detailed communication with your accountant. However, simple tax planning softwares such as TurboTax might be perfectly acceptable for those who began dabbling in crypto this year. If you have traded in large volumes, especially on the business side, then you’ll want to get advice from a certified public accountant (CPA) who is up-to-date on the current IRS guidance. They are very knowledgeable in these matters and can easily step in to help, especially when there is a unique situation with your crypto finances.
