Search:  as  xxx  test  minedollars  as,))(..,(

Crypto taxes: Not as easy to hide from as you'd imagine

Crypto taxes: Not as easy to hide from as you'd imagine
 
 
    Many people couldn't help but brag about their brilliant Bitcoin investments if they rode any of the bull run in 2021.
 
    But when it comes to handling taxes? Many don't have a clue of what to do. Did you see a gain? A loss? How could I owe taxes if I never cashed out?
 
 
    A sizable group of investors began dabbling in Bitcoin and other digital currencies in 2021 — and now they're dealing with tax consequences for the first time. It won't be as simple as looking at a stack of 1099 tax forms sent by a brokerage or others because those forms are not currently required to be issued to help you determine your gains or losses for digital currency.
 
    "There's a huge burden on everyday individuals to accurately compile their taxes," said Austin Woodward, CEO of TaxBit, which was founded in 2018 and provides tax and accounting software for the tokenized economy, as well as ways for traders to track the real-time tax impact of their virtual currency activities. The TaxBit network supports more than 20 currency exchanges to give customers year-round tax solutions.
 
    Woodward prefers to use the term "crypto-property" when it comes to taxes. The IRS treats these digital currency holdings as property, much like trading stocks. You're looking at capital gains and losses — yet digital currency isn't just like owning stock.
 
    "This is not just buy, hold, sell, like it is in the equity world," Woodward said.
 
    You can, for example, have peer-to-peer transactions where you trade with others directly. Digital currency can be used as a point of sale payment.
 
    "It's now used for staking, lending and interest bearing accounts," Woodward said, noting that's why outside services can help with tracking.
 
    A hot trend in digital currency involves trying to make money by lending out one's crypto holdings or pursuing other strategies, such as staking to generate rewards or interest for owning crypto.
 
    And it's a huge tax headache.
 
    It's not enough to talk about Bitcoin and other virtual currency with friends. Now, it's time to tell all to the IRS — even if you didn't become a millionaire.
 
    "I do dabble in it. My kids dabble in it. And none of us have become millionaires," said Mark Steber, chief tax officer at Jackson Hewitt Tax Service.
 
    "Wow, you just wonder how these people make all these millions that you read about. Now, I'm not sure that it's always been true."What is true, he said, is that trading in virtual currencies is a $2 trillion industry.
 
    "It's on the IRS radar and make no mistake about it," Steber said.
 
    What's the first tax tip for crypto?
 
    To start, a question is listed on the front of the 1040 form, right above the section for providing information on dependents.
 
    "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?" the IRS asks on the 1040.
 
    Those who engaged in a transaction involving virtual currency in 2021 must say "yes" to a question on Page 1 of Form 1040 or Form 1040-SR.
 
    "Do not leave this field blank," according to an IRS alert called "What's New" in the instruction booklet for the current tax season.
 
    "The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency."Who should answer yes?
 
    "Taxpayers who sell crypto, get paid in crypto for services, mining, airdrops, staking," said Kirk Phillips, chair of the the virtual currency task force for the American Institute of Certified Public Accountants.
 
    While there's no clarity on some issues, Phillips said, if you earned rewards for holding certain cryptocurrencies, known as staking, it's likely  you need to say yes.
 
    If you're buying or selling Bitcoin or other virtual currency, he said, you must start tracking those transactions right away using some type of crypto tax software.
 
    "Keep memos for special events like IDOs (token generation events)," as well, he said.
 
    You also want information to document whether you lost access to a digital wallet and the transactions or an exchange went defunct.
 
    IRS officials said the agency is mindful of helping get people into tax compliance through appropriate reporting of transactions.
 
    A bigger tax paper trail was mandated for cryptocurrency in the Infrastructure Investment and Jobs Act signed by President Joe Biden Nov. 15, 2021.
 
    Cryptocurrency exchanges will be required to send 1099-B forms to cover transactions beginning in 2023.
 
    New reporting requirements will drive up the taxes that many pay and are estimated to raise an additional $27.9 billion over the next 10 years, according to the Joint Committee on Taxation.
 
    Why is the IRS asking questions?
 
    A similar question about virtual currency was on the 1040 for the 2020 tax year. But experts say taxpayers ended up being confused by the 2020 question's use of the word "send." It stated: "At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?"Phillips said the word "send" was removed from the 2021 return because send equals transfer and transfers are not taxable when the currency is moving from one wallet to another wallet of the same owner.
 
    The 2020 question also created other types of confusion.
 
    Last year, Phillips said, taxpayers wanted to know if they only bought crypto and had no sales if they needed to answer yes. The IRS later clarified they did not need to do so.
 
    "The language was changed from 'acquire' in 2020 to 'dispose' in 2021 to avoid that confusion," Phillips saidMark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois,   says the IRS is concerned that many investors in virtual currency are not reporting their gains, which are taxable.
 
    "It's taxable whether you get a 1099 or not," Luscombe said.
 
    The latest question on the 2021 return, Luscombe said, should more closely correspond the "yes" answers to taxpayers who may have a tax reporting obligation.
 
    IRS has eye on crypto trades
 
    Think you can avoid the scrutiny of the IRS? Think again.
 
    The IRS has been using what's called a "John Doe Summons" to uncover large groups of taxpayers who have used cryptocurrency but aren't reporting it properly.
 
    Last year, for example, the IRS served a summons on the cryptocurrency exchange Kraken to request information on investors who made at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020.
 
    The ability to operate anonymously has long been a hallmark of the cryptocurrency universe, creating much of the mystique early on. But as crypto goes more mainstream, and more layers of regulation are added, investors need to understand that the IRS isn't going to look the other way. Experts note that cryptocurrency exchanges have robust know-your-customer-policies in place, making activity traceable.
 
    "If you're in the cryptocurrency, virtual currency arena in any form or fashion, you need to be compliant," Steber said.
 
    In 2019, the IRS warned taxpayers that the agency was sending letters to those who "failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly."The IRS notes that it has different types of these letters: "Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors."More:President Biden's new order will put cryptocurrency under federal scrutinyIf necessary, taxpayers would need to amend their past returns, pay back taxes, interest and penalties.
 
    "The IRS is catching up on all fronts," Steber said. "They've been sending out those 6173 letters, reporting of virtual currency in your account.
 
    "They have their technology on it. They have the question on the front of your tax return. They're getting much more aggressive with the broker dealers. And, in fact, there's a new law in place that will require starting in 2024 for tax year 2023 for (1099) statements to be issued" by cryptocurrency exchanges.
 
    Celebrity star power
 
    All you had to do was watch the Super Bowl last month to know how much virtual currency has exploded, as Hollywood's legendary cynic Larry David downplayed digital in a high-priced ad for the cryptocurrency exchange FTX. And NBA superstar LeBron James talked about timing and calling your own shots in an ad for Crypto.com.
 
    Two names on everyone's radar told us about companies that most of us know nothing about — even though we've heard plenty about Bitcoin.
 
    Bitcoin more than doubled in value from the start of 2021 through November 2021 when it reached an all-time high of around $69,000.
 
    More:Scammers go after lucrative tax credits, use new tricks to file fake tax returnsMore:Will old student loans chip away at my tax refund?
 
    More:IRS says average tax refunds up by 13.7% so far. Is your refund better or worse?
 
    More:Some tax filers shocked by smaller than expected refunds: What could trigger decreaseSure, one incredible 50% meltdown followed in late January before those Super Bowl ads hit. After a few wild weeks, though, Bitcoin regained much ground and was trading around $42,600 on March 22 — still well below that all-time high.
 
    When it comes to tax returns, virtual currency is incredibly complicated and we're even seeing TV ads for TurboTax and others playing up how to address virtual currency holdings this tax season.
 
    What's taxable when you trade in Bitcoin, ethereum?
 
    Where people could get tripped up, Steber said, is when they've exchanged one digital currency for another — not putting actual cash into their own hands.
 
    "There's a lot of unintentional tax avoidance," Steber said. "There's probably some intentional out there. But a lot of people think, 'I didn't get any cash.' "Just because you didn't cash out doesn't mean you've avoided a taxable transaction.
 
    Super Bowl ads, such as this one with Larry David for trading platform FTX, showed how much virtual currency is now part of the landscape.
 
    "You bought and sold, bought and sold, split and bought and sold, forked and bought and sold," Steber said.
 
    "It doesn't matter that you didn't get any cash. You've got 20 transactions there. You've got gain all over the place.
 
    "Cashing out is irrelevant. If you have sold, whether you got cash or another bitcoin, you have a taxable transaction, gain or loss, to be determined," he said.
 
    "A lot of people equate cash out with income. So they just don't report it. And they don't get a statement so they don't know that they have Box 1 (listing) $25,000 of crypto sales."Phillips said paying attention to tax obligations is key.
 
    "Use the same cost basis method year to year," Phillips said.
 
    If necessary, make estimated quarterly payments as you calculate taxes during the year.
 
    "Taxpayers should be careful not to reinvest staking rewards or sales proceeds without putting some to the side for taxes," Phillips said.
 
    A visual representation of the digital currency bitcoin that uses the so-called blockchain technology.
 
    "If the market takes a swing down then you may have a big tax bill and the assets could be worth less than the tax," Phillips said.
 
    The IRS notes that a transaction involving virtual currency includes, but is not limited to:
 
    Receiving Bitcoin or other virtual currency as a payment for goods or services.
 
    Receiving new virtual currency as a result of mining and staking activities.
 
    Receiving virtual currency as a result of a hard fork, or when a single cryptocurrency splits in two.
 
    An exchange of virtual currency for property, goods or services.
 
    An exchange or trade of virtual currency for another virtual currency.
 
    A sale of virtual currency.
 
    Any other disposition of a financial interest in virtual currency.
 
    Receiving or transferring virtual currency for free — without providing any consideration — in situations that do not qualify as a bona fide gift.
 
    Take note if you're paid in virtual currency for work you do: You must report the income as you would report other income, such as W-2 wages.
 
    Why did I get a 1099-MISC?
 
    Woodward, CEO of TaxBit, said far more 1099-MISC forms were issued by cryptoexchanges this year to taxpayers so that they can report income when digital currency is received for a referral bonus or staking and other reasons.
 
    A 1099-B would report gains and losses, he said, but many people do not receive that information now. Some exchanges for digital currency will issue a 1099-B but not all this year.
 
    Some players are adding some additional tax help now. Coinbase, a cryptocurrency exchange, introduced a tax center this tax season to offer a personalized summary of taxable activity on Coinbase.
 
    Cryptocurrency exchanges will need to collect information from customers so that a 1099-B can be issued. You'd have to disclose your name, Social Security number and address and phone number.
 
    The gross proceeds from any sale of digital assets would be reported on a 1099-B, as well as any long-term or short-term capital gains.
 
    The one-year plus or minus rules apply for long-term and short-term gains after selling or exchanging the currency.
 
    "If you held the virtual currency for more than one year before selling or exchanging it, then you will have a long-term capital gain or loss," the IRS notes in its online Q&A on virtual currency.
 
    Tax implications for trading in virtual currencies can be extremely complicated. File photo: Photo taken in 2018 of gas stations, like this BP station in Harper Woods, that had indoor ATM-like stands where consumers can use cash to buy bitcoin.
 
    Long term capital gains are taxed at a rate of 0%, 15% or 20% on 2021 returns, depending on your taxable income.
 
    Holding the currency for one year or less before selling or exchanging it would trigger a short-term capital gain or loss.
 
    Short-term gains generally are taxed at the same rate as your ordinary income, anywhere from 10% to 37%, depending on your income and filing status. We're dealing with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and the highest at 37%.
 
    You'd use Form 8949 to figure out the capital gain or loss and report it on Schedule D of the 1040.
 
    The fun, clearly, surrounds making the right bet on Bitcoin — not watching the periodic, steep sell-offs or digging deep into all the tax implications.
 
    

You may be interested in this articles: