IRL Taxes on Digital Currency: 5 Things You Need To Know About Crypto Taxes
Whatever your stance on digital currency, there’s one thing we can all agree on: because it can function as money, the US government is extremely interested in having some of it.
Yes, even though one of crypto’s main selling points is that it is decentralized (no one government controls it), you do still have to mind the government when buying and selling crypto.
As Tax Season 2022 approaches (taxes are due April 18th, 2022!) and your world gets exploded by TurboTax solicitations, it’s worth giving some thought to what you did with your crypto holdings over the past year.
After all, the IRS considers virtual currencies like Bitcoin property. Because of that, they have taxable value that’s based on capital gains or losses.
Though we here at Antsy Labs are fans of IRLA Coins over crypto coins (that’s In Real Life Achievements if you’re just joining us), we recognize that more and more of you are dipping your toes in the crypto world.
Just how many people use crypto, and who are they? The numbers range from more than 8% of Americans (according to TripleA) to 16% of all Americans (according to the Pew Research Center). For a more skewed statistic, evidently 83% of all Millennial millionaires also hold crypto.
(If those “millionaires” would still be millionaires if the market drops wasn’t mentioned in the article.)
If you’re more of a hide-your-gold-bars-in-the-hills kind of investor, then we hope you’ll read on and share this with anyone in your life who’s been bitten by the Bitcoin bug.
(Of course, before you read on, let’s be clear that Antsy Labs doesn’t provide tax advice. What you’re reading is meant to be a helpful summary on the current state of affairs presented in an accessible way. It is not advice nor is it an individualized recommendation, and one should consult a tax professional regarding their own tax circumstances.)
What To Know About Filing Taxes And Crypto
What You’re Required To Report - The first and most important thing to know is what you’re required to report on your taxes about your crypto activity. For filing in 2022, we’re talking about your crypto activity in 2021. As U.S. taxpayers, we’re required to report crypto sales, conversions, payments, and income to the IRS, and state tax authorities where applicable. As you wade through your transactions, keep notes on how you actually used cryptocurrency. Some will be put into a category for Taxable Events, and some will be Non-Taxable Events.
What Is Considered A Non-Taxable Event For Crypto - If you’ve only bought crypto with cash and held it during the year, donated it to charity, received it as a gift, given it a gift (up to $15,000), or transferred it to yourself (between wallets, for example), then these are all considered non-taxable events.
What Is Considered A Taxable Event For Crypto - In essence, if you used cryptocurrency in a way that made you money, that was a taxable event. Examples include selling cryptocurrency for fiat currency, using crypto to purchase goods or services, or trading different types of digital currency. The last one is important to consider because your conversion of Bitcoin, let’s say, to another coin is a sale, so if you made that trade when the market value was higher than when you bought it, you’ll owe. Likewise, if you get paid in crypto, if you’re mining crypto, if you’re earning staking rewards, or you receive other incentives or rewards, you need to log the fair market value of all of those events.
Capital Gains, and How Long You’ve Had Your Crypto - If you live to day trade cryptocurrency, you’re living in the land of short-term capital gains, otherwise known as gains that were realized on an asset that was bought and sold within a year. If you’re one of the original HODLers and you’ve only just sold (how dare you), you’re realizing a long-term capital gain. If you want to get into the nitty-gritty of capital gains tax rates, TokenTax has laid out a few helpful charts.
- Handling Crypto Transactions - If you knew the paperwork that would be coming, maybe you’d go back to 2011 and tell yourself not to get those dozen Bitcoins (or maybe not). According to Forbes Advisor, the following forms depend on how you’re using crypto, your crypto activities, and your professions, so choose the ones that are most applicable to you.
- Form 8949 - This form is for every purchase or sale of crypto as an investment. It will include the total number of coins, the date and price you bought, the date and price you sold and your gain or loss for each transaction.
- Schedule D - This form summarizes your total capital gains and capital losses from all investments, including crypto.
- Schedule C - If you’re mining crypto, it depends on whether you are considering it a hobby or a business. Is it a business? Then you may owe self-employment taxes if your income exceeded your expenses for the year
- Schedule 1 - Is your cryptomining a hobby? Then fill out Line 8 of Schedule 1. It’ll save you from paying self-employment tax for the revenue, but it will also limit what you’re allowed to deduct as an expense.
What To Do When It’s Finally Time To Pay Taxes
The tax adventure is almost over… for now. At the risk of stating something completely obvious, you will have to do this again next year (even if you sold everything right now!). How do you feel? Were the above steps relatively painless? Or were there points of stress?
So, taking the long view of things, consider how you can be more proactive to make your 2023’s review of 2022 simpler. One of the best ways would be to set up (and maintain!) a spreadsheet that logs your activities like you filled out for Form 8949:
- Track your total number of coins
- The date and price you bought, the date
- The price you sold
- And your gain or loss for each transaction
Depending on your level of activity, consider setting a reminder once a week or once a month to update it. That way, when the time comes to involve Uncle Sam, you’ve got a clear view of your cryptocurrency over the past year.
As for this year, we wish you the best of luck navigating your taxes, whether you’re filing real money, virtual money, or some other kind of money we don’t know about yet.