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Tax Implications of Crypto: 5 Things You Should Know

07/13/22 · Reports · This is not a financial advice
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If you’ve been making use of the discount prices of everything non-essential and bought cryptocurrencies, it's important to understand the tax implications you’re facing.

Cryptocurrencies are not considered legal tender in the United States, so any gains or losses from their sale are treated as capital gains or losses.

This means that you owe the IRS a report of any profits or losses and the taxes on them.

But the 2022 reality is that now that DeFi and staking exists, cryptocurrencies may in fact be subject to capital gains tax, income tax, or GST. Keep reading for a list of tips.

  1. Do I have to pay tax from staking yields, crypto bounties and crypto airdrops?

    Right now, the IRS does not provide info on how to tax staking rewards. Accountants recommend treating staking yields the same way as crypto airdrops:

    • Crypto airdrops are taxable in the same way as a freelance income, but only if the rewarded token could be freely traded at the moment of distribution. (Revenue Ruling 2019-24)

    This means that crypto staking earnings should be reported as a freelance income if you earned a cryptocurrency that was trading on crypto exchanges and could be sold.

    The IRS wants you to report airdrop and staking profits at the exchange rate of the day when you received your reward and you get taxed whether you actually sold the token or not.

  2. What is the capital gains tax rate for cryptocurrencies?

    The capital gains tax rate for cryptocurrencies is the same as the capital gains tax rate for other investments. You are liable to pay capital gains if you trade cryptocurrencies or if you sold your cryptocurrency after holding it for some time.

    The capital gains tax rate is the percentage of the profit that you have to pay on your investment when you sell it. If you just hold the crypto without selling it, there is no capital gains tax to pay. If that crypto was staking income or an airdrop, you should pay an income tax of it.

    For most people, the capital gains tax rate will be 20 percent. However, if you are in a higher income bracket, you may have to pay a higher capital gains tax rate.

  3. What should I do if I receive a notice of proposed adjustment from the IRS regarding my cryptocurrency taxes?

    If you received a notice of proposed adjustment from the IRS regarding your cryptocurrency taxes, the agency believes you have not been correctly reporting your digital currency transactions. You will need to take action to correct this and may need to pay back taxes, interest, and penalties.

    The first step is to determine exactly what the IRS is proposing. The notice will likely include a summary of your transactions and an estimated tax owed. You will then need to review these calculations and compare them to your own records. You can provide documentation to support your position if there are any discrepancies.

    Once you have determined the accuracy of the notice, you can begin figuring out how much you owe in back taxes, interest, and penalties. This can be a complex process, as cryptocurrencies are still a new asset class, and there is little guidance from the IRS on how they should be taxed. You may want to seek professional help to ensure that you are calculating everything correctly.

    If you agree with the proposed adjustments, you must submit payment for the amount owed. If you disagree or cannot pay immediately, you can request a Collection Due Process hearing to try and reduce or eliminate the amount owed.

  4. How can I use tax return folders for storing my records?

    You can ensure your cryptocurrency transactions are organized by using physical tax folders. It helps to quickly and easily identify the important documents that make up each cryptocurrency tax return.

    Here are some general tips on how to use tax return folders to store your crypto records:

    • Create a folder for each year's return.
    • Label the folder with the year the return was filed.
    • Print all of the transaction needed to support the return.
    • Store the folder in a safe place.

    It's a good idea to keep copies of your tax returns and supporting documents for a few years. That way, you'll have them if you need to reference them for future tax years.

  5. What are crypto on-ramps and do they have any special tax implications?

    A crypto on ramp is a digital platform that allows users to buy and sell crypto easily. They can also be used to store cryptocurrencies in a digital wallet. Crypto on-ramps make it easy for people to get into or out of the cryptocurrency market.

    The tax implications of using crypto on-ramps vary from country to country, but it’s usually the same as for trading on crypto exchanges. In most countries, there is a capital gains tax on profits from selling cryptocurrencies.

Final Words

The tax implications of owning cryptocurrencies are important to understand. Depending on your country of residence and how you use your cryptocurrencies, you may be subject to different tax treatments. It's important to seek professional advice to ensure you are paying the correct amount of tax on your cryptocurrency holdings.

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