As taxpayers around the world prepare to pay their returns, it’s never a bad idea to explore the topic of taxes. But how do crypto taxes work and what are some key points to know going into this year’s tax season? It’s important that you’re aware of the guidelines implemented by the IRS when it comes to reporting your taxable cryptocurrency purchases, transactions, sales, and trades.
Speaking generally, if you purchase cryptocurrency, it is not considered to be a taxable event. If you bought cryptocurrency but you didn’t spend or trade them, you won’t owe any taxes on them. Let’s say you purchase Bitcoin and you continue to hold it in your digital wallet without trading, exchanging, or selling it, you won’t owe taxes on it.
Here are the taxable situations that the IRS has outlined:
Another topic regarding how do crypto taxes work is capital gains. The IRS treats cryptocurrencies as property which means if you spend it or trade it, this is considered taxable. Determining the capital loss or gain depends on the difference in price between when you acquired the asset, the sale proceeds, and the overall holding period. As you can imagine, it’s important to keep tabs on your transactions so your taxes are filed accurately and properly, something with which an expert can help. Cryptocurrency software is also a helpful asset in this situation.
Another important consideration to keep in mind is the wash sale rule. After all, the price of cryptocurrency is constantly changing. This rule states that if you have an investment that’s lost money and you end up selling it, you aren’t able to buy it back within 30 days before or after the sale. Cryptocurrency is advantageous to other assets in regard to the wash sale rules as assets classified as property by the IRS are not subject to wash sale rules.
If you’ve also been involved in non-fungible tokens, you’ll want to keep other rules in mind. For example, anyone who trades, sells, or buys NFTs needs to keep careful records and pinpoint the equivalent dollar amount of the underlying currency when the transaction happens.
Let’s say you purchased Ethereum at the beginning of the year and used it to purchase an NFT a few months later. During this time, the currency increased in value. You’ll need to keep track of the dollar equivalent at the time of each transaction.
We know it can be overwhelming to navigate the ins and outs of cryptocurrency taxes. If you’re still wondering how do crypto taxes work and you aren’t sure where to begin, our experts are here to help. We are happy to work with you to ensure that your tax filings are timely and accurate. Contact us at Founder’s CPA for a free consultation!
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