Welcome to our first installment of Crypto FAQs. For our first round, we’ll look at some of our most frequently asked questions about crypto taxation. This post will answer:
- What should I do if I haven’t filed/reported crypto activity yet?
- What triggers a taxable event?
- How are NFTs Taxed if I am a collector?
Crypto FAQ: What should I do if I haven’t filed/reported crypto activity yet?
Answer: If you haven’t yet reported any of your crypto activity, you’ll want to take action as soon as possible to amend your previous tax filings. You may not know how to do this which is why we’re here to help! As a first step, we highly recommend that you reach out to our team of crypto accountants for guidance on how to properly file and report your activity. We know how to work quickly, diligently, and accurately to save you money in the long term.
Once we have a better understanding of your previous transactions, our team will work with you to amend your previous tax filings to ensure they are accurate. If your taxes are inaccurate or don’t cover the full scope of your transactions, you’ll be subject to a tax bill if the government audits your accounts. Moving forward, our team will make sure that you’re taking the steps to accurately file your crypto transactions on a regular basis.
Crypto FAQ: What triggers a taxable event?
Answer: This is an incredibly common question that our experts receive and we’re happy to help! Taxable events refer to any transaction that results in a gain or loss. If you earn money, receive a profit, or sell your assets (for fiat or another digital asset), it is considered a taxable event. Capital gains are a common example of taxable events; it occurs when there is an increase in value in capital investment above the purchase price.
While taxable events cannot be legally avoided, they can be minimized with the right investment strategies. Taking control of your tax bill can reduce how much you owe on taxes, so it’s important that you understand how scenarios will play out before taking action. Our team at Founder’s CPA is always happy to help!
Crypto FAQ: How are NFTs taxed if I am a collector?
Answer: As NFTs, or non-fungible tokens, rise in popularity, it’s important that you understand how they are taxed. Because NFTs are one of a kind, cannot be duplicated, and have a unique value, you cannot swap out one NFT for another. Whether you are creating and selling NFTs or you are simply purchasing them, you must consider the tax implications.
In most scenarios, NFTs abide by the same tax laws as cryptocurrencies. For example, if you’re an artist who earns money by selling an NFT, you’ll need to report the proceeds as income on your tax forms. If you invest in NFTs and later on sell or trade it for a profit, you will be subject to capital gains tax.
Taxable NFT activities include:
- Selling an NFT in exchange for cryptocurrency
- Trading NFTs
- Using fungible cryptocurrency to purchase an NFT
To avoid an unwelcome surprise on your year-end tax bill, make sure to consult with our experts at Founder’s CPA for additional guidance.
In addition, if you are a collector of NFTs you may be subject to higher tax rates, per IRS Sec. 408(m).
If you are interested in talking to one of our Crypto CPAs please fill out the free consultation form below or learn more about our blockchain and crypto services here.