Only a day after the jubilation that always accompanies New Years Eve and New Years Day, a sense of dread washes over all those business-minded persons who were lucky enough to make money on what has arguably been the worst year in cryptocurrency’s short history. This is where your accountant comes in.
Says District Advisory, a Washington, DC outsourced accounting firm, never has there been a more important time than now to find an accounting firm that provides the strategies and the value you need to succeed during tax season. From strategy calls, to monthly financial reports, to high-touch communication and advisory services, if you hold crypto or any form of assets, you are going to require the tax insight you need right at your fingertips.
That said, how exactly will the IRS tax your crypto holdings for the year 2022? You might be surprised how many holders of Bitcoin (BTC) and other crypto assets have no idea how the process works. According to a new report by The Motley Fool, it might not be the most thrilling part about crypto investing, but of you hold digital currencies it’s vital that you are aware of how taxing crypto works.
Even though crypto, including BTC, is still considered new, the IRS is working very hard to enforce tax compliance laws. Fact is, there’s a number of ways you can end up owing money on your crypto holdings. Even trading one crypto for another is considered a taxable event.
You’re also going to need to pay taxes if you’ve realized financial gains on other digital assets like NFTs or non-fungible tokens. If you’re the type who doesn’t keep accurate records of every transactions, it might be impossible to accurately assess your losses and gains when it comes time to do your taxes. Even honest mistakes can cost you when it comes to IRS penalties.
That’s said, here’s what you need to know about how the IRS will tax your crypto holdings in 2022.
Paying Taxes on Your Crypto in the USA
Says the Motely Fool if you are a resident of the U.S., you are required to pay taxes on your crypto. The IRS considers crypto like BTC and ETH as property. Crypto transactions are, by law, taxable, just like transactions on real property are also taxable.
The IRS stipulates that taxes are due when you trade, dispose, or sell crypto and at the same time, achieve a gain. For instance, of you purchase $1,000 of Bitcoin and sell it later on for $1,500 you need to pay taxes on the $500 gain.
However, if you purchase $1,000 and sell it off at $700, you can report a $300 loss. Many crypto holders will likely be reporting big losses for 2022 since the entire market dropped close to 80 percent.
Purchasing crypto is said not to be a taxable event. You can purchase and hold it without having to pay any taxes even when the digital asset increases in value. The taxable event occurs when you sell the crypto.
You need to keep in mind that the IRS has been taking specific steps to insure that all crypto investors pay their fair share of taxes. When filing your taxes you will be required to answer a Form 1040 that inquires about whether or not you made any transactions related to digital assets during the year.
Your crypto exchanges will provide you with a 1099-K for clients who have made more than 200 transactions and moved more than $20,000 in crypto during the trading year.
How Do You Know if You Owe Crypto Taxes
You will owe crypto taxes if you’ve spent your crypto after it has increased in value from the time you purchased it. These are some of the different taxable events for crypto transactions:
–Using crypto to purchase services and goods.
–Selling crypto to create fiat currency.
–Trading one cryptocurrency for another.
But these events are only taxable if the value of your crypto has risen. When determining if you owe crypto taxes, you are said to require the cost basis, which is the entire amount you paid to acquire your crypto stash. You then compare that amount to the sale price or the proceeds when you used your crypto.
If you bought Bitcoin when it was worth $20,000, here are some events that will be considered taxable:
–If you used a single BTC to purchase a car worth $45,000, you must report $25,000 in gains.
–If your BTC rises in price to $50,000 and you sell it all, you need to report the $30,000 in gains.
–If you trade your BTC for $60,000 of another crypto asset, you must report $40,000 in taxable gains.