A growing number of crypto investors have confused over their tax obligations as crypto grows in popularity. The co-founder of an intelligent tax platform answers five common questions that tax professionals face.
Let’s start with some good news. Cryptocurrency taxation has evolved from a one-size-fits-all stance to a more nuanced approach. That considers staking, hard-forks, payments, and gifts, as well as other crypto-related events.
Though this change has been beneficial, fundamental issues remain. For example, crypto transactions, including wallet transfers and digital currency exchanges, have required new thinking.
While you’re trying to navigate the gray areas of crypto taxation, here are five essential questions you’ll be asking this tax season. Please note that this information does not constitute tax advice for any individual. You should consult the IRS website if you have questions specific to your situation.
#1 Am I still responsible for paying taxes on my crypto even if I didn’t receive a tax form from my exchange?
Sure. As far as the IRS is concerned, virtual currencies are considered property. You should report gains or losses when you sell them. Whether you sold your crypto over the counter (OTC), on an exchange, you need to report this transaction. Including crypto transferred through local wallets, this treatment applies to both on-chain and off-chain transactions.
#2 My exchange assessed a crypto tax I transferred to myself as taxable; now what?
It is common for crypto traders to have multiple wallets and transfer crypto from one account to another. You are not taxed on transfers between wallets you own and control. Numerous wallets, however, can create complications in tax reporting because of the lack of context exchanges and wallets provide and may classify transactions as taxable events. Keeping meticulous records and using white-labelled wallet addresses will help you avoid problems. A tool like Cointracker can help you keep track of your crypto activities. To ensure accuracy, you must review each transaction individually and mark it appropriately.
#3 Is it taxable if I buy cryptocurrency with another cryptocurrency?
As an example, you might want to consider the purchase of a non-fungible token (NFT) where you needed an on-ramp to purchase it in ether. Taxes associated with such transactions are complicated because the assets exchanged have separate units of account, and you must report them in U.S. dollars. As per the IRS, when you have made a transaction using both currencies, your basis and the sale amount must be determined in U.S. dollars, and that difference must be reported. For those who cannot find documentation from their exchange or made an OTC transaction, explorers and trackers like CoinMarketCap or Messari may provide helpful information.
#4 Can I deduct crypto from my taxes if I received it through staking or forking?
Yes. In accordance with IRS rules, if you receive cryptocurrency through a hard fork, you should treat it as ordinary income based on the fair market value when you receive it. A tax professional may be able to help you with unclaimed rewards, as stated above. It may be beneficial to use third-party tooling to help document your holdings if you risk outside of an exchange that documents fair market value.
#5 Is cryptocurrency taxed as income or capital gains?
It depends. A cryptocurrency that is disposed of is considered a capital gain or loss by the IRS, while a cryptocurrency that is staked or forked is regarded as ordinary income. Exceptions may apply, including crypto received as a gift and exempt from the rules. A tax platform like April provides context for your filing and guarantees its accuracy. For questions about your situation, you should consult a tax professional.