Some big changes occurred towards the end of the 2021 tax year. The long bill talked about the taxation of cryptocurrencies, especially those that facilitate the trading of “digital assets”. In this article, we have penned down a guide on Cryptocurrency Taxes for taxable transactions and events during 2021 and 2022.
The new law stipulates that all cryptocurrencies must issue Form 1099B to anyone who buys or sells cryptocurrencies in the past tax year. This form has already been submitted by brokers for trading stocks and bonds.
Cryptocurrencies are traded in very different ways, so there are some issues with this new rule. The problem with this is that simple-cryptocurrency mining companies don’t have a record of who exactly bought the tokens to mine.
Cryptocurrency Taxes for 2021 and 2022 from the perspective of the IRS
The IRS can provide a complete picture of what crypto traders expect, but it is becoming more and more aggressive in pursuing people who have exempted these transactions in the last few years.
In 2022, we can expect a more aggressive search for cryptocurrency tax evaders. Last year, the IRS launched one such secret operation named “Hidden Treasure” to combat fraud. This IRS survey looked for cryptographic transactions that were omitted from previous tax returns. Agents specially trained in all types of cryptocurrencies have formed an IRS team working on this project. They are focused on taxpayers who omit cryptocurrency income from their tax returns.
While the IRS is investigating cryptocurrency payments that are in short supply, how they calculate the taxes is a completely different story.
The IRS has classified all cryptocurrencies as assets as of 2014. But this broad definition and what investors should do with their cryptocurrency transactions leaves a lot of room for interpretation.
In short, anyone who holds the crypto for less than a year before selling it must tax the profits from it as recurring profits. Similarly, those who hold crypto longer should consider the profit as a capital gain or loss and report it as such.
Cryptographic filing and tax payment
The IRS appears to be aggressive in both cryptocurrency classification and enforcement, but the actual tax law hasn’t changed much in recent years. After all, cryptocurrencies are still considered property.
Cryptocurrencies are generally treated like any other investment that you may own or sell in a year. If you buy a stock for $ 10 in January and sell it for $ 15 in December, your recurring profit will be $ 5.
If you purchased the stock in the previous year, the income will instead be considered long-term capital gains and will be taxed as such Cryptocurrencies are treated equally.
Crypto to Fiat – Every time you sell a virtual currency in exchange for USD or another fiat, it would create a taxable event similar to the selling of stocks for the money.
Cryptocurrency to Other Cryptocurrency – The exchange of one cryptocurrency like Bitcoin for another like Ethereum is considered the initial disposition of the asset. So be aware that the IRS requires you to report any crypto gains first. You will then use this price as the cost basis for your new crypto wallet.
Cryptocurrencies in Goods and Services – As noted, whenever you pay for an item with cryptocurrency, the IRS treats it as if you were selling it FOR an exchange. This is a very annoying but important distinction that should be reflected on your tax forms.
Cryptocurrency Mining – New crypto mining and staking require reporting during tax season. This is considered “enriched” as reported by the IRS in 2019. And as mentioned, it can also lead to the need to issue your own 1099B form starting in 2023.
Non Taxable Events
There are two types of transactions that do not require reporting, let’s take a look at them:
Buy and Hold Cryptocurrencies – If you only buy and hold cryptocurrencies, you are not yet liable for taxes on them. Only when you sell or trade them should you report a profit or loss.
Transfers between wallets – As long as you are not actually selling or trading new crypto, simply transferring the same crypto between wallets is not a “taxable event”.
Cryptocurrency Taxes for 2021
Capital gains taxes are divided into two categories, short-term and long-term.
Short-term capital gains tax is a tax applied to profits from selling an asset you’ve held for less than a year. Short-term capital gains taxes are paid at the same rate as you’d pay on your ordinary income, such as wages from a job.
Long-term capital gains tax is a tax applied to assets held for more than a year. The long-term capital gains tax rates are 0 percent, 15 percent and 20 percent, depending on your income. These rates are typically much lower than the ordinary income tax rate.
SHORT TERM tax brackets for the 2021:
Married Filing Jointly
Head of Household
DATA SOURCE: IRS
LONG TERM tax brackets:
Married Filing Jointly
Head of Household
It is important to maintain a good record of your crypto transactions and properly report all your taxable events in your income tax return as the IRS is working hard to enforce crypto tax compliance. In this article, we have covered cryptocurrency taxes for transactions and events during 2021 and 2022, tax rates and more.
Professional Accounting Solutions can assist you with all your cryptocurrency taxes. Contact a crypto tax expert today.