US Crypto Tax Guide 2022

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US Crypto Tax Guide 2022

Satoshi Nakamoto created Bitcoin with decentralisation as the key component of the blockchain. It is fair to say that at cryptocurrencies’ dawn of time, Satoshi’s Bitcoin launch, very few people saw the future of virtual currencies growing. And even governments didn’t actually mind BTC making rounds. Fast forward to 2022, where cryptocurrencies have immensely grown; financial authorities are now scrambling to find rules that will ‘regulate’ the ever-growing activity of the digital currency market. 

The U.S. Cryptocurrency Stance

As the holders of the global reserve currency, the U.S. is at the forefront of the push for crypto regulation, and one of their agendas is crypto tax. This article will outline how the crypto taxation landscape in the U.S. currently looks.

At around 2014, the IRS gave its ruling on digital coins like Bitcoin and Ethereum, saying it considers virtual currencies as property for tax purposes. According to the IRS. Cryptocurrencies are similar to other forms of property that incur capital gains and capital losses on investments as you trade, sell, or maybe dispose of your crypto.

It’s crucial to note that cryptocurrencies fall under different tax brackets depending on how you use them, and you will have to pay a certain percentage of tax.

Tax rates depend on your capital gains and fluctuate based on your personal tax bracket and whether the gain was short-term or long-term.

In case you earn crypto via a job, staking, mining, operating a node, airdrops, or interest from lending, you will have to incur income taxes on the US Dollar value of your crypto earnings at the time you receive the digital coins.

When Do You Owe Taxes on Your Crypto?

You will incur a tax reporting requirement when you incur a taxable event from your crypto activity.

In Layman’s term, you incur a taxable event when you trigger or realize income or previously unrealized gains; according to the IRS virtual currency guidance, cryptocurrency taxable events include:

  • Trading crypto for fiat currency like the US dollar
  • Trading one crypto for another – that’s because it’s considered a disposal
  • Earning crypto as income – because it’s considered ordinary income subject to income tax
  • Spending crypto to purchase goods or services

Furthermore, how much tax you are liable for depends on your income tax bracket and the holding period of your crypto assets, whether long-term or short-term. Each crypto user is susceptible to different taxes on their cryptocurrencies.

Short-term Capital Gains

It lies on cryptos held for less than 12 months before being sold. The short-term crypto tax has similar tax rates as your normal income and does not get any special tax treatment under the tax code.

Long-term Capital Gains Tax Events

It is considered cryptos held for 12 months or more before being sold. Governments also offer incentives for crypto users who hold their digital assets long-term. It’s important to note that long-term capital gains tax rates top out at much lower rates than short-term gains.

On the other hand, some terms don’t require crypto users to pay taxes. For example, you do not incur any tax when holding Cryptos. Holding crypto in a wallet does not require crypto tax reporting because you have not yet realized any gain or loss on your investment.

But the moment you trade or trigger a taxable even by disposing of your digital assets, you realize a capital gain or loss, thus being susceptible to tax.

Another case is when you are transacting wallet-to-wallet transfers. Transferring Cryptos between your wallets is not a disposal of your coins; hence you do not trigger any taxable event.

Also, you do not incur taxes for using your digital assets as collateral for a loan. That’s because you can use your crypto as collateral for a loan without disposing of the collateralized property. Once you repay your loan and the collateral is reimbursed, the underlying cryptocurrency will return to the original owner tax-free.

Does the IRS Track Your Crypto?

The crypto community may consider the decentralized nature of cryptocurrencies as a way to evade tax easily; well, it’s not!

Popular exchanges like coinbase issue 1099-MISC forms to the IRS, which surrenders customer information and a record of their crypto income.

Suppose the IRS realizes no cryptocurrency income is reported on your taxes. In that case, your account gets flagged, and an automated CP2000 letter will alert you of your non-reported income and tax liability.

The IRS can use the 1099-MISC forms to match ‘anonymous’ wallets to unknown individuals who may help mitigate tax fraud. For example, the IRS utilized contractors like Chain analysis to analyze the blockchain and significantly crack down on tax fraud.

The 2021 infrastructure bill requires all crypto exchanges to submit 1099-B forms to users and the IRS.

What if You Don’t Report Your Crypto Taxes?

If you intentionally don’t report your gains, losses, and income on your texts, you will have committed tax fraud under the IRS threshold.

You may incur penalties, including criminal prosecution of five years in prison and a fine of up to $250,000.

The IRS has been on a never-ending mission to crack down on cryptocurrency tax compliance issues. Over the years, it has issued tens of thousands of warning and action letters to Coinbase users suspected of inaccurate tax reporting. 

Furthermore, the agency has updated the main US income tax form (1040) to include a question that every US taxpayer has to answer under penalty of perjury, “At the time during 2021,did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?”

As the crypto ecosystem evolves dad-by-day, the crypto community will likely get more cryptocurrency tax audits and tax prosecutions.

All 2022 crypto taxpayers have to update their taxes until April 15, 2023. The deadline for all tax liaises is June 15, 2023.

It’s common for crypto investors to forget that their crypto-related earnings must be reported on their taxes. In this case, you can take care of your prior year’s tax return to include your crypto-related earnings with IRS Form 1040X.

Conclusion

Every crypto investor must amend their returns in good faith rather than waiting for the IRS to find them. Although you can’t guarantee that you won’t get audited after amending your taxes, sorting out your taxes before the IRS begins an investigation can go a long way to demonstrate that further inquiry is unlikely to find additional reporting errors.

Is crypto taxable in the U.S.?

The IRS has ruled that cryptocurrencies are property for tax purposes. Therefore, all income earned from trading must be reported on a 1099 form and taxed at regular rates.

Can I pay taxes in the U.S. with crypto?

A complete No! The IRS does not accept any form of virtual currency payment, taxes included.

Is Investing in crypto safe?

Crypto investments could be great for those who want exposure to Bitcoin and other cryptocurrencies without worrying about them crashing or losing all their savings. However, cryptos should be invested only after consulting with an experienced professional. Moreover, investing in cryptocurrency requires advanced knowledge of financial markets, technology, cryptography, economics, etc.