3 Ways To Prepare For Taxes On Cryptocurrency Gains In  This Tax Season

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3 Ways To Prepare For Taxes On Cryptocurrency Gains In  This Tax Season

The cryptocurrency industry has had a spectacular year, surpassing $3 trillion in market cap in November 2021. Bitcoin and ether, two of the most popular cryptocurrencies, also reached new highs.

As a result of its widespread acceptance, policymakers have placed a greater emphasis on cryptocurrency regulation as well as taxes on cryptocurrency gains. They debated frameworks on investor rights, taxation, and other issues throughout the year. As a result, additional regulations are most likely to follow.

If you were one of the many people who traded bitcoin or other digital assets in 2021, there are three things you should do right now to get ready for the 2022 tax season.

Calculating Taxes On Cryptocurrency Gains

Cryptocurrency, in the United States, is taxable as property, according to the Notice 2014-21. The taxes on cryptocurrency gains range from 0% to 37%, depending on a number of factors:

  • Holding period of assets (either short-term or long-term capital gains)
  • Yearly income and tax-filing status
  • The accounting method used for computing gains (such as LIFO, FIFO, or HIFO)

3 Ways To Prepare For Taxes On Cryptocurrency Gains

1. Record Keeping

When filing the 2021 tax returns, crypto investors must declare taxable transactions involving any of the digital currencies they’ve made transactions in, to the federal government.

If you’re in this situation, start by estimating your gains and losses. You might have many crypto wallets and use various crypto exchanges, you must make sure that everything is sorted and taken care of.

It’s up to you to sort things out, even if it’s tough if you have many wallets and utilize different exchanges, as is frequent. The Internal Revenue Service’s website points out that investors must retain documents adequate enough to demonstrate the stance held on taxes on cryptocurrency gains.

It’s critical to put solid recordkeeping first. It’s ideal to maintain your bitcoin transaction history for at least three years, however, this depends on your personal circumstances.

2 Track Your Gains And Losses

Next up, you should choose a trustworthy cryptocurrency and portfolio management software application that monitors transactions, calculates gains and losses, and stores proof in the future.

Investors can use this opportunity to accurately create their tax profile and justify their due taxes to the IRS.

Furthermore, working with a CPA – who can assist you through the filing process and assist you to prepare for the future – may be beneficial, especially as the likelihood of greater bitcoin regulation grows.

3. Eyes On The News

The topic of cryptocurrency regulation has gotten a lot of attention in the last year. Though it’s hard to estimate what will be enacted, it’s important to be informed of what’s going on in the news.

Officials suggest putting “wash sale” laws on commodity, currency, and digital assets in 2022 as part of the Build Back Better Act. If enacted, this will make it illegal for cryptocurrency investors to acquire back the same asset after selling it at a loss.

Furthermore, the bipartisan infrastructure bill passed into law in November includes tax reporting regulations that apply to digital assets such as cryptocurrencies and nonfungible tokens, or NFTs, and will force cryptocurrency brokers to report bitcoin earnings on a form similar to 1099.

The measures, however, will not go into effect until January 2024, and in the interim, advocates for the cryptocurrency business aim to campaign for modifications and separate laws to change them.

Reporting Taxes On Cryptocurrency Gains

Here are some of the tax forms that you may need to report your taxes on cryptocurrency gains:

Form 8949

If you have any transactions that can be termed as capital gains and losses, this is the form to choose. You can easily fill them up using transaction reports from crypto exchanges.

Form 1040 (Schedule D, Capital Gains, and Losses)

This is the form you’ll have to file to report annual income tax returns. It contains a summary of your capital gains and losses.

Form 1099-MISC (Miscellaneous Income)

 If a client has earned $600 or more than that in a tax year, this form is reported to record rewards or fees revenue from staking, bonuses, and other similar programs.

The Bottom Line

Cryptocurrencies have grown in popularity as a financial asset, but crypto taxation still remains a complicated and unclear issue. While the IRS has issued updated guidelines, crypto investors and traders should make sure they’re using the proper software to automate taxes on cryptocurrency gains and losses calculations, as well as consulting with a CPA to eliminate the slightest chances of error.

FAQs

1. Do I pay taxes on cryptocurrency gains?

Cryptocurrency, in the United States, is taxable as property, according to the Notice 2014-21. The taxes on cryptocurrency gains range from 0% to 37%, depending on a number of factors, such as the holding period of the crypto, the accounting method, and your yearly income and tax-filing status.

2. Can you avoid capital gains tax on cryptocurrency?

Buying cryptocurrencies inside of an IRA, 401(k), donating crypto to tax exemption organizations, or other retirement plans are the best options to delay or eliminate tax on your cryptocurrency assets. If you buy bitcoin in a regular IRA, the profits will not be taxed until you start taking distributions. 

3. What happens if you don’t report cryptocurrency on taxes?

The IRS considers cryptocurrency as property and has laid down regulations for paying taxes on cryptocurrency gains. Failing to report taxes, tax evasion, and tax fraud are all federal criminal charges as a result. You might face fines of over $100,000 and a year or more in federal jail if you are convicted.