Starting this year, anyone who owns cryptocurrency is required to file taxes. The tax filing period is in full flight, but just how much do you know about cryptocurrency tax filing?
Cryptocurrency tax returns can seem complicated at first glance, but don’t worry! We’re here to help you out with the 5 top facts you need to know about cryptocurrency tax returns in 2022.
1. Cryptocurrencies are subject to taxationThe IRS has started cracking down on people not paying taxes when they purchase, sell or even hold cryptocurrency. If you traded cryptocurrencies this year, these transactions are considered as capital gains and are subject to taxation. Even holding on to cryptocurrency that has generated interest is now considered to be interest income and must be included in tax reports.
2. What happens if you don't file a report?Since 2019, the IRS has been sending warnings to cryptocurrency traders. The federal agency is constantly improving its cryptocurrency-related tax evasion prevention systems. The IRS also receives reports of traders' transactions directly from cryptocurrency exchanges. Cryptocurrency traders who do not voluntarily file their tax returns can be fined up to $250,000 and sentenced to five years in prison.
3. How cryptocurrency taxes are calculatedAt this point, you may be wondering how your crypto taxes are calculated. To put it simply, you subtract the price of the crypto at the time of purchase from the price of the crypto at the time of sale. However, this can quickly get confusing. For example, what happens when you sell only part of the cryptocurrency you purchased this year? In this situation, you can choose between multiple options.
The results can vary greatly depending on each option. Consider this hypothetical example:
In 2021, you bought three ETH at three different prices. The first one was $2000, the second one was $2500, and the last one was $2300. You then sell 1ETH for $2100. How do you calculate your gains or losses for the year? There are four different methods: FIFO, LIFO, HIFO and Special ID. Find out more about these here
https://cointelli.com/blog/crypto-cost-basis.
4. How to prepare a virtual currency tax report
In 2019, Form 1040 was amended to include the following question: "Have you ever received, sold, sent, exchanged, or gained any other financial benefits during the tax reporting year?" Even if you're merely holding on to a cryptocurrency, the answer is yes.
The way you prepare your report varies depending on how the cryptocurrency was used. Was it treated as an investment asset or was it used as a payment method? In the former case, you must report the transaction information and your calculated income and losses using Form 8949, Schedule D. In the latter case, if you used it to purchase virtual currencies or goods, you must report it on Schedule C. Find out more about preparing your report here
https://cointelli.com/crypto-tax-guide.
5. Tips for choosing platformsWhen preparing your tax report, you should organize your transaction details in advance and document the evidence. It is recommended that you use an exchange that provides your transaction history in a CSV file or supports API integration.
From that point, the easiest way to get your forms filled out quickly and accurately is to use crypto tax calculation software. For more, click here
https://cointelli.com/.
