If you own a cryptocurrency, you may be wondering how to report it on your taxes. While some cryptocurrency exchanges may issue a Form 1099-B, you are ultimately responsible for tracking your taxable activity and the currency‘s fair market value. A recent bipartisan bill signed into law by President Biden requires brokers to issue Form 1099-B, but starting in the 2023 tax year, brokers will no longer have to issue the form. Instead, exchanges will be required to report to the IRS directly any transactions that take place in crypto.
Taxation of new cryptocurrency
A recent case in which a NFL offensive tackle took his paycheck in bitcoin may lead to some controversy regarding taxation of new cryptocurrency. Russell Okung, a member of the New York Giants, will have to report his cryptocurrency income to the IRS if he accepts such payments. The IRS’ Notice 2014-21 lays out some of the basic principles for taxation of cryptocurrency income. Basically, it states that any amount you receive from mining cryptocurrency is taxable income.
Regardless of whether you’re a value investor or a speculator, you must realize that your tax burden will depend on your decision to invest. Depending on the amount you invest, you can either pay the full tax on your profits or only pay a small percentage. However, if you plan to hold your crypto for the long term, the government offers several tax incentives to encourage long-term investment. Because capital gains are considered investments, you can expect to pay a lower tax rate if you hold your crypto for 12 months or longer.
Forms 1099-K and 1099-B
You may be wondering what these forms mean for your crypto-related income. While these are intended for crypto exchanges, most of them also have built-in reporting features. The forms generally report the gross transaction volume, but do not identify taxable gains or losses. For these reasons, you should only use Form 1099-K when you are considering the tax consequences of cryptocurrency trading. In this article, we’ll look at the differences between these two forms.
Form 1099-K covers a variety of transactions, including referral bonuses and crypto earnings. Some crypto exchanges issue Form 1099-K. These forms summarize electronic payments made by individuals and businesses to the individual. However, these forms aren’t required for investors selling crypto tokens. To protect yourself from unnecessary penalties and fines, it’s important to verify TINs. This is important for ensuring accurate records and avoiding a hefty IRS penalty.
Cost basis methods
You will have to choose one of the cost basis methods for cryptocurrency to report your assets in your crypto tax report. You may choose the first-in-first-out cost basis method if you are buying crypto for investment purposes without a unit identification. You will have to keep accurate records of all transactions. You should also be consistent with the cost basis method you choose for all the years that you hold crypto. This is because a change in the value of a crypto asset may result in a tax liability higher than what was originally purchased.
Using Specific Identification is a more flexible way to calculate capital gains, and you may not have to use the most expensive unit. This method reduces crypto capital gains tax while allowing you to prioritize long-term and short-term gains. This method will help you determine the best crypto tax calculation scenario. You can choose which one works best for you by taking a look at the different cost basis methods and which one will reduce your tax bill the most.
Reporting cryptocurrencies to the IRS
If you’re in the business of selling or buying cryptocurrencies, you might be wondering about reporting cryptocurrencies to the IRS. While it may not be necessary in every case, it’s essential to report any taxable event related to cryptocurrencies. The new tax law, passed in 2021, has expanded the definition of brokers to include digital asset transfer services, such as cryptocurrency exchanges. Consequently, any platform that facilitates the sale or purchase of cryptocurrencies must report such transactions to the IRS.
Tax filing is a complex process for most taxpayers, and crypto activity in 2021 makes the task even more complicated. Crypto investors often transfer between wallets, interact with different products offered by crypto exchanges, and use decentralized protocols to conduct transactions. Identifying taxable transactions can be particularly challenging. Because of this, investors must know how to determine cost basis, keep good records of the original purchases, report all transactions in U.S. dollars, and determine the taxability of gray-area transactions.