The IRS has been bragging for the past several months about how it is becoming more knowledgeable about cryptocurrencies and aggressively enforcing their tax laws. In addition, holders of digital assets received a not-so-subtle warning from the tax authorities that they still need to report income from specific digital transactions this year.
In order to prevent uncomfortable conversations with the IRS down the road, founders and entrepreneurs who possess cryptocurrencies should talk with their accountants or tax experts about the following tax topics as the April 15 tax deadline draws near.
How are crypto assets categorized by the IRS?
The IRS views cryptocurrencies as property, which means that transactions are liable to capital gains taxes, according to its website. The tax rate is mostly determined by the length of asset ownership; short-term gains are subject to a higher tax burden than long-term gains.
In cryptocurrency, what is a taxable event?
In the world of cryptocurrency, there are more taxable events than just exchanging digital currencies for fiat money. A tax event may arise from switching from one cryptocurrency asset to another, including stablecoins. The taxable amount will rely on the asset’s original cost basis when it is sold. It may surprise you to learn that purchasing digital tokens and transferring them between wallets or exchanges are not taxable events. On the other hand, taxable scenarios include selling tokens for a profit or a loss, getting digital assets in exchange for products or services, and receiving cryptocurrency interest. To simplify this situation, consider using the Taxcaster tool to assist you in reporting taxable scenarios appropriately.
Is there a tax benefit to crypto?
The volatility of cryptocurrencies can present opportunities for tax minimization through loss harvesting to astute investors. Here, a cryptocurrency owner can lawfully exchange an asset for a stablecoin or another kind of cryptocurrency if its value has decreased. Unlike with typical securities, they can buy back the underlying asset immediately. By purposefully capturing losses, this tactic lowers the overall tax obligation.
Additionally, owners can deduct a $3,000 loss from other business income under this year’s tax rules. The IRS permits you to stack and carry over any more cryptocurrency losses you incurred in 2023 into subsequent years until the total amount of losses is canceled out.
Is it tricky tracking and reporting crypto to the IRS?
Since tax monitoring software for crypto has emerged and can link to your cryptocurrency exchange account directly, tracking and reporting cryptocurrency transactions for tax purposes has been easier. Even for transactions that are several years old, these solutions can automate the procedure, guaranteeing accuracy and compliance with tax requirements.
The complexity of the crypto tax makes it unavoidable. All transactions must be documented, valuations must be understood in US dollars, both short- and long-term periods must be taken into account, and you must know when income tax or capital gains must be applied. It’s higher-grade stuff, stated Michelle Legge, Koinly’s head of crypto tax education.
It’s advisable to consult tax experts with experience with digital assets if you have specific issues about crypto. According to Legge, successful tax management necessitates year-round attention, particularly in light of the complexity brought on by crypto investments. Soon after the current year’s filing, the next tax season should be planned.
In order to take advantage of the opportunities that digital currencies bring, investors and entrepreneurs must be aware and proactive in order to comply with tax legislation.
