Crypto Taxes: How Is Cryptocurrency Taxed?

The popularity of cryptocurrency has soared incredibly in recent years, forcing the imposition of taxable fees on all transactions. The previous deadline for submitting your 2021 cryptocurrency taxes or requesting an extension was April 18, 2022. However, you can now submit it maximum by October 17, 2022, after asking for an extension.

When Does Your Crypto Transaction Become Taxable?

Planning ahead is the best thing you can do to simplify your tax filing for crypto-related expenses. Thus, it is crucial to know when your crypto transaction becomes taxable in order to properly file.

If you spend your cryptocurrency and its value has increased since you first purchased it, you owe crypto taxes. You will not have to pay taxes on the virtual currency you recently purchased with US dollars if you keep it in the exchange where you made the purchase or move it to your personal wallet.

Moreover, when you exchange cryptocurrency, it becomes taxable. This includes exchanging your cryptocurrency for dollars or purchasing another cryptocurrency, such as Ethereum with Bitcoin. Even if you have purchased goods or some services, it falls into a taxable transaction.

What about NFTs?

A blockchain records NFT, a non-fungible token linked to a specific digital or physical asset, and is, in fact, taxable. There are, however, circumstances in which they are or are not taxable with that as well. The act of minting (creating) an NFT is not taxable, but transactions involving the creator selling newly minted NFTs are.

Also, if two parties decide to exchange NFTs, they both will have to pay taxes whether they face gain, loss, or an ordinary income on the transaction based on the NFT asset’s value. According to general tax laws, the recipient’s basis becomes available to offset the recipient’s gain when the NFT is sold or exchanged if any value that was reported as income and any fees associated with receiving the NFT were paid. For example, a taxable event would be paying gas fees to mint an NFT.

Now, how much do I owe the IRS?

How to Do Crypto Tax?

The process for reporting your cryptocurrency gains and losses is easy to do.  To file your cryptocurrency tax, you should keep in mind the following 5 steps:

1. Determine your cryptocurrency gains and losses.
2. Fill out IRS Form 8949.
3. Add your 8949 totals to Form Schedule D.
4. Add any cryptocurrency income.
5. Finish completing your crypto tax return.

It is best to work with a tax professional who has experience interpreting tax codes connected to virtual currencies. On the other hand, you will be able to easily report your cryptocurrency earnings yourself using your standard tax software if you are just starting out trading Bitcoin or another cryptocurrency and have only a few transactions (with accurate cost basis reporting and crypto tax rate).

However, since the IRS and other regulators cannot issue guidance on every situation a taxpayer may run into, there are plenty of gaps in current guidance. That’s why it’s essential to look for a tax professional who is familiar with current IRS standards and has experience reporting cryptocurrency gains and losses.  You can ask potential tax experts if they own any virtual currency themselves and ensure they realize the uncertainties in the tax code. 

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