Updated: Feb 2, 2022
It’s no secret that cryptocurrency is changing the investment game, with Bitcoin reaching a market capitalization of $815 billion in early 2022. If you were one of the lucky investors to hop on the virtual currency rocket before it took off, you might be faced with a hefty tax bill this upcoming tax season.
When to Report Crypto
The IRS views all digital currency as property, with crypto as no exception. You don’t need to report anything on your tax return when you purchase crypto. However, when crypto is sold, transferred, exchanged, or received as compensation, the income is subject to capital gain and ordinary income taxes, depending on the situation. There are cases where crypto is not taxable, including donating shares directly to charities and receiving them as a bona fide gift.
The tax laws surrounding crypto gains and losses are based on how long the crypto was held and the original purchase price. Your basis in crypto, the cost you bought it at, is subtracted from the selling price to determine taxable income. When you hold the crypto for over a year, you are subject to long-term capital gains, but if you bought and sold shares within the same year, you are taxed at short-term capital gain rates, which is usually the same rate as your tax bracket.
The first steps in compliance with the IRS are solid record-keeping procedures and filing accurate tax returns. If you feel overwhelmed, hire a qualified accountant, like Abdul Tax Consulting and Accounting Services. This can ease your burden and ensure full compliance when reporting your crypto transactions.