Filing cryptocurrency taxes can be a confusing and daunting task for many individuals. The US Internal Revenue Service (IRS) treats cryptocurrency as property subject to capital gains taxes. Knowing this would seem to make filing crypto taxes simple, but the unique nature of cryptocurrencies means there are many unanswered questions.
Accurate reporting of wins and losses can be a nightmare. While everyone who cares about tax season knows that keeping accurate records of every crypto transaction is a must, there are other things to keep in mind.
There is a difference between short-term and long-term capital gains taxes, as tax rates vary depending on multiple factors. These capital gains tax rates are available online and are beyond the scope of this article, which will focus on avoiding potential issues with the IRS while filing taxes on cryptocurrency.
How to report crypto taxes
Filing cryptocurrency taxes is not an option; It is an obligation of every individual and company. Those who keep track of their transactions — including the prices of the cryptocurrencies they transact with — will have an easier time reporting their activities.
Even those who have not received any tax documents associated with their cryptocurrency movements may have taxable events to report. Speaking to Cointelegraph, Lawrence Zlatkin, vice president of taxation at Nasdaq-listed cryptocurrency exchange Coinbase, said:
“Cryptoassets are treated as property for tax purposes in the US, and taxpayers must report gains and losses when there has been a sale, exchange, or change in ownership (other than as a gift). Mere HODLing or transfers of cryptocurrency between the taxpayer’s wallets are not events subject to tax.”
Zlatkin added that more advanced trading “where there is a change in economic ownership, literal or substantial, may be taxable,” even if the taxpayer has not received an IRS Form 1099, which indicates miscellaneous income.
Meanwhile, Danny Talwar, Head of Taxes at Coinley’s Crypto Tax Calculator, told Cointelegraph that investors can report cryptocurrency gains and losses through Form 8949 and Schedule D of Form 1040.
IRS Building in Washington, D.C. Source: Joshua Doubek
Talwar said that investors who experienced losses in cryptocurrency after last year’s bear market may be able to save on current or future tax bills by harvesting tax losses.
Tax loss harvesting refers to the timely sale of securities at a loss in an attempt to offset the amount of capital gains tax that would be payable on the sale of other assets at a profit. The strategy is used to offset short and long term capital gains. Coinbase’s Zlatkin addressed the strategy, saying, “Losses from cryptocurrency sales or exchanges may result in capital losses that can be used to offset capital gains and, in limited circumstances for individuals, some ordinary income.”
Losses “may not have sufficiently crystallized from a pending and unresolved bankruptcy or fraud,” Zlatkin added, adding:
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“Taxpayers should be careful how they handle losses and also consider the possibility of theft or fraud losses when the facts support these claims.”
He said cryptocurrency investors should consult their tax advisors regarding any available tax breaks or deductions. Investors should be aware of losses from “laundry sales,” which Zlatkin describes as “crypto sales at a loss followed shortly thereafter by a buyback of the same type of crypto.”
Speaking to Cointelegraph, David Kemmerer of cryptocurrency tax software firm CoinLedger said losses in 2022 could be an “opportunity” to lower the tax bill, with capital losses offsetting capital gains and up to $3,000 in income per year.
“It is important to remember that interchange and gas blockchain fees come with tax benefits,” David Kemmerer added, as fees “directly associated with acquiring cryptocurrency can be added to the cost basis of the asset.”
He added that fees related to the disposal of cryptocurrency could be deducted from the proceeds to help reduce capital gains taxes.
While the IRS has fairly clear guidelines on taxes due from the purchase and sale of cryptocurrency, the tax forms of those involved in this sector can become more complex if they delve deeper into, say, the world of decentralized finance (DeFi).
Tax complexities with DeFi, staking and forks
Using DeFi can be complex, as some strategies involve multiple protocols to increase returns. Between crypto-backed loans, transactions involving liquidity provider tokens and airdrops, it is easy to lose track.
According to Coinbase’s Zlatkin, “most forms” of cryptocurrency rewards or returns are subject to US tax when received.
He said current US laws on income staking are “undeveloped”, with the IRS treating staking bonuses as “leading to taxable income when an individual taxpayer receives staking bonuses over which the taxpayer has ‘control and control'”, or essentially