Crypto & Taxes: Your Up-to-Date Crypto Tax Guide

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What you need to know Cryptocurrency prices increased significantly from December 2020 to December 2021, but have since fallen. Crypto is considered property, which means that proceeds from sales are treated as long-term or short-term capital gains or losses. The wash sale rules do not apply to crypto, which makes it useful for tax loss harvesting.

Cryptocurrency investors have had a wild ride over the past two years. From December 20, 2020 to December 19, 2021, the price of bitcoin (BTC) increased by 93% and that of ethereum (ETH) by 495%.

But the good times were over in November 2021. Bitcoin and Ethereum both peaked earlier in the month, and their collapse since then has been dramatic. From December 19, 2021 to December 18, 2022, bitcoin fell by 67% and ethereum by 70%.

Given this pattern and the currently depressed market price coins, it is likely that your clients who have purchased crypto in the last two years and are still holding their positions have unrealized losses in their portfolios. Now is a good time to review tax rules and strategies for crypto investors to know what, if anything, can be gained from the crypto crash.

How the IRS Views Crypto Gains and Losses

The IRS treats cryptocurrencies like property, so the same short-term gain and loss or long-term gain and loss rules apply to the sale of crypto assets that apply to other traditional capital assets, says Jesse Rodriguez, head of Kaufman Rossins’ tax advisory group. In Miami.

It’s based on the holding period, and the tax rate depends on the taxpayer’s adjusted gross income and filing status, Rodriguez says. Short-term rates will be taxed at ordinary income rates and the long-term rate may be 15% or 20%, depending on the total adjusted gross income for the year in question.

The additional 3.8% tax on net investment income may also apply, he adds.

Charles Kolstad, a partner in the private client, tax and corporate teams at international law firm Withers, adds a caveat for active traders, however. In most cases, investors are not brokers or traders and therefore report all gains and losses as short-term (held less than 12 months) or long-term (held more than 12 months) capital gains or losses. 12 months), he explains. Investors who trade regularly may be referred to as traders, in which case gains and losses constitute ordinary income or ordinary losses.

How to Declare Crypto on Your Taxes

Tax forms for reporting crypto transactions should be familiar to securities investors. Trevor English, vice president of marketing at Ledgible, a crypto tax and accounting platform, says taxes on crypto transactions are typically reported on Form 1040 Schedule D and Form 8949, which is used to report sales and fixed asset exchanges.

Investors may also receive a Form 1099-B from the exchanges they use, and in the future they may receive a specialized Form 1099 for digital assets, tentatively named Form 1099-DA, from the crypto exchanges where they trade.

Tax complications

However, investing in crypto can increase reporting complexity because the IRS is very focused on the potential for tax evasion through the use of crypto assets, according to Kolstad. For example, he notes that on the first page of Form 1040, taxpayers must answer whether they have made any crypto transactions for that tax year. Taxing specific transactions can also be complicated, says Kolstad.

Crypto is classified as property for US tax purposes, so every transaction involving the conversion of fiat currency, such as US dollars, into crypto, the exchange of one form of crypto for another, the exchanging crypto for NFTs (non-fungible tokens), selling NFTs for crypto, and converting crypto to fiat currency are all separate taxable events, he explains. Investors must track their tax base for US tax purposes to determine their taxable income in US dollars, not crypto, so many investors are sitting with large unrealized taxable losses.

Tracking the tax base and calculating gains and losses on crypto trades can mean unexpected work for securities investors who are used to receiving detailed 1099-B forms from their stock brokerage firms, says Rodriguez. Some crypto exchanges may provide a 1099-B form, but the report may lack cost basis information if the crypto holdings were moved between an offline storage device (a cold wallet) and the exchange account.

Additionally, crypto users often have accounts on multiple crypto exchanges and have multiple self-custodied wallets where they store their crypto and NFT holdings, Kolstad says. Transfers from one wallet to another are not taxable events, but the tax basis of the transferred crypto should be tracked across multiple wallets. This can make it difficult to determine the exact amount of taxable income for investors who trade frequently.

This difficulty has spawned several crypto wallet and tax reporting software applications that provide basic tracking and portfolio transaction and reporting. These programs, such as Ledgible and CoinLedger, among others, allow tax investors to link their accounts to the exchanges they use and their crypto wallets; Built-in tracking and reporting makes tax return information easy.

They do a pretty good job of summarizing wins and losses, and we certainly work hand-in-hand with a lot of these platforms, Rodriguez says. They’re definitely a big part of the tax component.

The basic reports could improve in the near future and simplify monitoring. According to Thomson Reuters and Ledgible, crypto reporting requirements under the Infrastructure Investment and Employment Act of November 2021 (PL 117-58) will come into effect on January 1, 2023 and will affect the US industry of cryptography. Key crypto-related provisions include:

The law extends reporting requirements for transactions involving more than $10,000 in cash to transactions involving digital assets. The law has the potential to affect the information companies collect and report to the IRS regarding crypto transactions. As the 1099 declaration arrives in the digital asset space, more concrete regulation could come from the Securities and Exchange Commission and the IRS. The bill requires crypto exchanges to submit Form 1099-B to report an annual profit or loss from a given crypto asset. The new rules will apply to statements issued after December 31, 2023, so information returns issued in 2024 will cover 2023 transactions.

Some clients may have extended their involvement with crypto beyond buying and selling. They could transact there, get paid there, exploit it, or earn interest on their holdings. Exchange-initiated transactions, such as color-named airdrops, hard forks, and soft forks, can also have tax implications for investors.

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