Filing taxes for cryptocurrency can be a confusing and daunting task for many individuals. The United States Internal Revenue Service (IRS) treats cryptocurrency as property subject to capital gains taxes. Knowing this appears to make filing crypto taxes simple, but crypto’s unique nature means there are many unanswered questions.
Accurately reporting gains and losses can be a nightmare. While everyone concerned about tax season knows that keeping accurate records of every crypto transaction is a must, there are other things to keep in mind.
There is a difference between short-term and long-term capital gains taxes, with tax rates varying depending on multiple factors. These capital gains tax rates are available online and are beyond the scope of this article, which will focus on avoiding potential issues with the IRS while filing taxes on crypto.
How to report crypto taxes
Filing cryptocurrency taxes isn’t a choice; it’s an obligation that every individual and business has. Those who keep track of their transactions — including the prices of the cryptocurrencies they transact — will have an easier time reporting their activities.
Even those who haven’t received any tax documents associated with their cryptocurrency movements may have taxable events to report. Speaking to Cointelegraph, Lawrence Zlatkin, vice president of tax at Nasdaq-listed cryptocurrency exchange Coinbase, said:
“Crypto assets are treated as property for U.S. tax purposes, and taxpayers should report gains and losses when there is a sale, exchange, or change in ownership (other than a gift). Merely HODLing or transfers of crypto between a taxpayer’s wallets are not taxable events.”
Zlatkin added that more advanced trading “where there is a change in economic ownership, literally or substantively, may be taxable,” even if the taxpayer doesn’t receive an IRS Form 1099, which refers to miscellaneous income.
Meanwhile, Danny Talwar, head of tax at crypto tax calculator Koinly, told Cointelegraph that investors can report cryptocurrency gains and losses through Form 8949 and Scheduled D of Form 1040.
Talwar said that investors with cryptocurrency losses after last year’s bear market might be able to save on current or future tax bills through tax loss harvesting.
Tax loss harvesting refers to the timely selling of securities at a loss in a bid to offset the amount of capital gains tax that would be payable on the sale of other assets at a profit. The strategy is used to offset short-term and long-term capital gains. Coinbase’s Zlatkin addressed this strategy, saying, “losses from sales or exchanges of crypto may result in capital losses which can be used to offset capital gains and, in limited circumstances for individuals, some ordinary income.”
Zlatkin added that losses “may not have been sufficiently crystallized from pending and unresolved bankruptcy or fraud,” adding:
“Taxpayers should be careful in how they treat losses and also consider the possibility of theft or fraud losses when the facts support these claims.”
He said that crypto investors should consult their tax advisers regarding any available tax breaks or deductions. Investors should also be aware of losses from “wash sales,” which Zlatkin described as “sales of crypto at a loss followed soon thereafter by the repurchase of the same type of crypto.”
Speaking to Cointelegraph, David Kemmerer from cryptocurrency tax software company CoinLedger, said that losses realized in 2022 can be an “opportunity” to reduce a tax bill, with capital losses offsetting capital gains and up to $3,000 of income per year.
David Kemmerer added that it’s “important to remember that exchange and blockchain gas fees come with tax benefits,” as fees “directly related to acquiring cryptocurrency can be added to the cost basis for the asset.”
He added that fees related to disposing of a cryptocurrency could be subtracted from the proceeds to help reduce capital gains taxes.
While the IRS has somewhat clear guidance on taxes owed from buying and selling cryptocurrency, tax forms for those involved in the sector can get more complex if they delve deep into, for example, the world of decentralized finance (DeFi).
Tax complexities with DeFi, staking and forks
Using DeFi can be complex, with some strategies involving multiple protocols to maximize yield. Between cryptocurrency-backed loans, transactions involving liquidity provider tokens and airdrops, it’s easy to lose track.
According to Coinbase’s Zlatkin, “most forms” of cryptocurrency rewards or yield are subject to U.S. tax when received.
He said that current U.S. laws on staking income are “undeveloped,” with the IRS treating staking rewards as “giving rise to taxable income when an individual taxpayer receives staking rewards over which the taxpayer has ‘dominion and control,’ or basically when the asset can be monetized.”
When it comes…
cointelegraph.com