Is crypto taxable? This is one of the questions many crypto users ask, they are yet to understand the logic behind crypto taxes. Yes, just like the traditional money crypto (Bitcoin) is taxable especially when you use them as a medium of exchange. The Internal Revenue Service IRS sees crypto as property like gold and stocks and taxes them alike. You are liable to pay tax whenever you do transactions like payments, exchange crypto to another crypto or fiat currency, etc.
However, your crypto gains are taxed differently as income or capital gains depending on how long you held or acquired them. Accounting for taxes from crypto transactions done within online exchanges is easy but not with the more active investors.
Following the new law signed recently by the US president, crypto taxes are an important aspect for every investor. President Joe Biden had on November 15 signed an infrastructure bill that requires crypto exchanges (brokers) to issue form 1099-B. This implies that these brokers are now mandated to send notifications of crypto transactions to the IRS. Aside from preventing crypto investors from hiding their gains, this new development will create tax reporting issues for many.
Again, exchanges reporting on investors’ trading activity have limited access to the payment details of those using a personal wallet. There is every possibility that they may give out inaccurate information to the IRS via the 1099 form. However, the IRS had previously given guidance on tax issues relating to crypto in IRS Revenue Ruling 2014-21 and 2019-24. They particularly concluded in 2014 that crypto is a property for federal tax purposes and not a currency.
This conclusion was what gave rise to crypto taxes, treating crypto trading profits like that of stock. Although the entire process isn’t as straightforward as it sounds.
What Investors Need To Know Concerning The New Law
The IRS tax rules are not very clear for crypto transactions including Bitcoin, they are confusing. The reasons are many as you can buy crypto with dollars and also crypto price fluctuates. You can as well withdraw it for cash via a Bitcoin ATM. These various transactions are not common in stocks trading where the IRS rules work better.
However, crypto investors that intend to keep to the new tax law should adopt these two steps for accurate reporting.
Track Their Cost Basis
This will enable them to know the accurate amount they originally paid for their crypto. They will then use it to reconcile with the reports the brokers give to the IRS.
Hire A Crypto Tax Professional
Getting a crypto-knowledgeable tax professional would be very helpful in ensuring accurate reporting of your crypto investments. It only requires your sincerity as regards the initial amount you paid for your crypto and what crypto you hold.
Crypto taxes are becoming the order of the day since the IRS concluded that crypto is taxable. The new US legislation also aided its present status. Investors are now subject to capital gains taxes when they buy and sell Bitcoin for profit. It doesn’t matter if it’s sold for a dollar or another crypto.
However, the capital gains tax is also applicable when you pay for goods and services with Bitcoin. Investors are advised to track their transactions and ensure the records are accurate. This is because of possible inaccuracy in the notifications the broker sends to the IRS as crypto transactions are not straightforward.
It’s also a good idea to hire a crypto tax professional to help you out. Cryptocurrencies are very volatile and you must ensure that you invest only what you can afford to lose.