Written By: MB Group
With the normalization of digital assets, it has become commonplace to invest and receive income in the form of cryptocurrency. This has caused a shift in behaviors, questions, and attitudes of investors and miners alike when it comes to their cryptocurrency assets. There is confusion surrounding tax implications, reporting, and rates that are synonymous with these earnings.
Tax rates for cryptocurrency can fall into two different categories, income, and capital gains. The determination between the two depends on how the monetary value is earned. For a full list of 2022 income tax rates, visit the IRS guide here. Income tax is applied to sources of revenue, including cryptocurrencies. This means that all income that has come from dividends, staking, mining, and lending will be added to your gross income.
The capital gains categorization is similar to the one used for more traditional investment vehicles, such as equities (stocks) and funds. A short-term capital gain (selling an investment before 12 months) will be taxed at your regular income tax rate for the year. A long-term capital gain category is when an asset is held for longer than 12 months without selling it. This does not apply to any dividends or interest you are receiving in the meantime for holding that asset. Long-term capital gains taxes are generally smaller than their short-term counterparts. The period begins on the day after the asset is received into your account.
Conducting your tax accounting with cryptocurrency should not be any different from reporting income from your regular investments, business, or W2 process. This means that any income or capital gains earned from digital assets need to be reported on your tax return to determine if there is any tax owing. Your accountant should be made aware of any financial dealings you have regarding digital assets.
There are many methods and avenues to choose from, but the IRS recommends specific identification accounting for cryptocurrencies. In this method, you are able to properly disclose the nature and value of your cryptocurrency, and the date it was acquired and sold, if applicable. The IRS only takes fiat currency as payment, so your cryptocurrency will eventually need to be given a final USD equivalent on your tax return in order to properly assess the amount owing.
Income from cryptocurrency is taxed at the same rate as your gross income. This means that it is added on top of any investment income, dividends, W2 income, contract work, or anything else that adds to your gross income and tax bracket. Alternatively, your cryptocurrency can also be held within your business, which may have different structures. It is best to speak to an accountant regarding your personal situation to properly determine the tax rate.
For example, if you are holding cryptocurrency as an investment vehicle in your corporation or limited partnership, you may only be responsible for your portion of the shareholder agreement. Furthermore, there are various exemptions and expenses that can be written off against the income you have received from your cryptocurrency gains.
Cryptocurrency is not any different from investment vehicles. This means that they follow the same rules as capital gains taxes on stocks and funds. As previously mentioned, capital gains taxes can come in two different categories: short-term and long-term.
Short Term: Short-term capital gains are often considered income. This is because the asset was sold within a 12-month period. You subtract the market value of the price by the book value (cost of acquisition) to determine your capital gain. If it is positive, it is added to your income. if you are filing business taxes instead, it will be added to your top line. Remember that any brokerage fees and losses can be written off in some circumstances in a corporate setting.
Long Term: A long-term capital gain is also determined by your personal income tax rate, but it is often less than if you are holding the asset for 12 months (or less). This incentivizes investors to make more long-term plays which can benefit the market as a whole. Full information on capital gains taxes can be found in section 409 on the IRS website.
The IRS takes income tax fraud very seriously. There is a specific cautionary advertisement on your return that mentions virtual currency, which makes it clear that any activity related to digital assets needs to be reported. Part of the reason why many federal and state regulations are surrounding this asset is its novelty and its ease of transfer. Cryptocurrency is an attractive vehicle for money laundering and tax fraud.
Failure to disclose income or capital gains related to your cryptocurrency can elicit a number of penalties and actions from the IRS. This can include audits, charges, fees, interest, the closer scrutinization of your future returns, or even criminal charges. Overall, it is extremely risky to not report your crypto on your tax return.
In an increasingly uncertain world, it is difficult to know the ins and outs of the tax code, and income-saving strategies. That's why having a qualified certified public accountant on your side can give you the peace of mind that you and your organization is covered. Contact the MB Group to get started today.
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