Cryptocurrency traders may have significant tax concerns due to the meteoric rise and fall of various cryptocurrencies, such as Bitcoin and Ethereum. The IRS is increasing its enforcement operations, so anybody with cash in their possession, much alone those who deal in it, should be careful not to break the law. Considering the IRS's stance on cryptocurrencies, achieving that goal might be simpler than you think.

"It's a fairly huge enforcement area for the IRS right now," says Tampa tax attorney Brian R. Harris of Fogarty Mueller Harris, PLLC. A lot of attention is drawn to their pursuit of bitcoin holders, traders, and users. Anyone in the group may be checked for compliance or audited.

While Bitcoin's (and other cryptocurrencies') anonymity (or at least a veneer of it) has been a selling factor, authorities have made progress in recent years in closing the gap.

In criminal investigations, "the IRS and FBI are becoming better at monitoring and tracing Bitcoin," adds Harris. He also notes that assets may be frozen if that becomes necessary.

This is why it's even more important for people who trade in popular cryptocurrencies to be aware of the law and any potential tax consequences of their behavior. Fortunately, the Internal Revenue Service (IRS) typically recognizes cryptocurrency holdings like stocks and bonds. The bad news is that this approach makes it more difficult to utilize cryptocurrencies to pay for products and services. Use a trusted platform like briansclub for investing and buying cryptos like bitcoin or Ethereum.

Things to Know About Crypto Taxes

Some important tax considerations and guidelines for staying within the law while dealing with bitcoin are outlined below.

If you own or utilize cryptocurrencies, you'll be questioned.

You must disclose any bitcoin transactions on your 2022 tax return. The question "During 2022, did you receive, sell, transmit, swap, or otherwise acquire any financial interest in any virtual currency?" appears prominently towards the top of Form 1040.

As a result, you'll have to provide the IRS with an unequivocal response as to whether or not you've ever dealt in bitcoin, placing you in the position of possibly lying to them. The IRS does not take kindly to liars or tax fraudsters, so it is in your best interest to respond honestly or face additional legal consequences.

Still, there is a caveat. The Internal Revenue Service clarified that taxpayers who have never converted virtual money into a fiat currency are not required to check the box for this question.

If you don't receive 1099, you're still taxed.

You (and the IRS) will get a Form 1099 from your bank or brokerage detailing the money you earned in the previous tax year. However, cryptocurrencies might be an exception to this rule.

Compared to standard 1099 forms for stock, interest, and other payments, "there isn't the same amount of reporting currently for bitcoin," adds Harris. "Coinbase and other exchanges don't provide the IRS with excellent reporting."

However, from January 1, 2023, workers in the business will be subject to stricter tax reporting requirements according to legislation passed in November 2021. Brokers, including, controversially, anybody who trades digital assets for another, must disclose their transactions to the Internal Revenue Service (IRS) using Form 1099 or a similar document.

Opponents argue that the bill will force those who don't have access to this information to comply with the new requirements since it applies to everyone who transfers cryptocurrencies. But legislators are already at work on a new draught that would restrict the scope of the law's application even more.

While you won't be issued 1099, it doesn't mean you don't have to declare and pay tax on your profits. On the plus side, if you have to incur a capital loss, you may deduct that amount from your taxable income.

Crypto exposes you to tax obligation

To some, they are exempt from taxation if they solely use cryptocurrencies for personal spending and never really trade them.

This is not the case!

It's possible to incur tax obligations whenever virtual currency is converted into fiat money or sold for physical products or services. If the price you get for your cryptocurrency (the value of the item or actual cash you receive) is more than your cost basis in the cryptocurrency, you will incur a loss. A bitcoin investor will have taxable gains if their returns exceed their initial investment.

If the market value of your products and services or real money is less than your cost basis in bitcoin, you will have a taxable loss.

Knowing your cost base is essential in any instance.

This is not a transaction tax, which is a key distinction to make. It's a capital gains tax levied on the profit made from trading cryptocurrencies. Similar to buying and holding stock, cryptocurrency investors will see profit or loss once they sell their holdings.

Crypto profits are regarded as capital gains.

What, you've made a profit on a transaction or a purchase? As with other types of financial gains, the IRS does not differentiate between those made through cryptocurrencies.

Short-term capital gains, or those on assets held for less than a year, are taxed at your standard tax rate (up to 37% in 2022, depending on your income). However, long-term capital gains tax (at a potentially lower rate) applies to assets held for more than a year (0, 15, and 20 percent).

Furthermore, cryptocurrency transactions follow the same criteria for offsetting profits and losses on investments. You may achieve a net loss of up to $3,000 each year by deducting capital losses. If your net losses are more than this threshold, they will roll over into the next year.

Bitcoin miners may be treated differently

How about bitcoin mining: do you do it professionally? Then, like any other firm, you could deduct the money you spend. The worth of what you make is what you take in as income.

"If you mine cryptocurrencies, you get revenue at the fair market value, and that fair market value becomes your basis in the coin," explains Harris. You can deduct these costs if you are engaged in a trade or company.

The final part, however, is crucial: you need to be actively engaged in commercial activity to be eligible. However, you will not be eligible for the same tax breaks available to legitimate businesses if you run your mining equipment as a hobby.

Crypto gifts are regarded as regular presents.

Gifts of cryptocurrencies, which you may have given to a younger relative in an effort to pique their interest, will be handled in the same manner as any other gift. Thus, if the amount is more than $16,000 in 2022, it may be liable to the gift tax. And when the time comes for the receiver to sell it, they will have the same cost basis as the donor.

However, if you give more than the yearly limit, you may still avoid paying gift tax by making use of the lifetime exemption.

Inherited crypto is handled like other assets.

When a cryptocurrency is handed down from one generation to the next, it is regarded the same as any other capital asset. If the value of their estate is more than $12.06 million in 2022, they may have to pay estate taxes.

Cryptocurrencies, like stocks, have their cost basis "stepped up" to their fair value on the day of death. That's why, according to Harris, most individuals approach bitcoin just like any other kind of investment asset.

Cryptocurrencies are exempt from the wash-sale regulation.

The Internal Revenue Service generally handles cryptocurrencies as capital assets, but it has a very different policy for wash sales. That's good news for the crypto market.

To avoid a conflict of interest, a trader who has sold an asset and taken a loss should not have bought the same item or one that is substantially comparable during the preceding 30 days. The transaction is considered a wash sell if the trader repurchases the asset during the 30-day period. Therefore, the trader can only deduct the loss once they have refrained from buying the asset for at least 30 days.

However, digital currencies are exempt from the wash-sale prohibition. This means that investors may sell a stake, record a loss, and then immediately buy the asset. This law is helpful since it permits investors to keep their money invested and yet claim the entire tax loss, making it risk-free to take advantage of the tax write-off.

However, politicians have discussed the possibility of removing this loophole. Therefore, it is possible that it will no longer exist.

Conclusion 

Keeping track of your cost basis, recording your effective realized price, and maybe paying tax on your cryptocurrency gains can be a lot of work. The Internal Revenue Service is also increasing its enforcement and monitoring of cryptocurrency exchanges in an effort to crack down on any tax avoidance. Each of these elements contributes to the overall difficulty of using bitcoins and will likely slow their widespread adoption. People interested in cryptocurrency use a platform like briansclub to invest and buy crypto.