How to File a Cryptocurrency Tax Return in 2022 – A Guide

If you put money into crypto last year, you may get a rude awakening when it’s time to do your taxes this year.

Yes, Bitcoin, Ethereum, and all other cryptos are subject to taxation. 

As a result, the IRS taxes cryptocurrency holdings the same way it does other assets, such as stocks or gold, because the IRS deems them “property” for tax purposes. The deadline for submitting your 2021 taxes or requesting an extension was April 18. If you asked for more time, you would have until October 17, 2022, to file. 

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Cryptocurrencies had a big year in 2021 when many new investors bought them. A study by Grayscale Investments revealed that most people who invested in Bitcoin did so in the past 12 months. But it was a roller coaster year for investors in the cryptocurrency world, with many all-time peaks and valleys.

This crypto tax guide breaks down everything you need to know about when and how to file tax returns for your cryptocurrencies. 

When Do You Need to File Taxes for Your Cryptos?

Using Dollars to Purchase Crypto

It does not mean you will have to pay taxes on your virtual currency purchases merely because you bought them with U.S. dollars and kept them in the exchange where they were purchased or transferred to your wallet. When your only crypto-related transaction this year was buying virtual currency using U.S. dollars, you don’t need to declare it to the IRS.

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Trading Cryptos

Using crypto as a currency is taxable. This involves selling crypto for dollars, swapping one crypto for another (purchasing Ethereum with Bitcoin), and paying using crypto. If you sell or trade an investment, it’s taxable. Hence, traders must be careful because every crypto transaction is taxable.

Minting or Trading NFTs

NFTs are taxed and can be bought and sold on OpenSea and SuperRare. Because the IRS hasn’t provided NFT tax guidelines, it can be perplexing. Whether you’re an NFT developer or investor and how much you engage with NFTs determines the tax implications of a certain NFT (i.e., as a business or hobby). When producing or minting NFTs, it is crucial to understand which activities are taxable and how these taxes operate.   

Say you mint NFTs for fun using 0.1 Ethereum. If you bought Ethereum for $100 and it’s worth $300 when you mint the NFT, you’ll make $200. You’d pay short-term or long-term capital gains tax depending on how long you had Ethereum before minting the NFT. 

If you’re a professional creator who mints NFTs as a business, the $100 is your base income. Selling an NFT for crypto or exchanging it for another NFT activates another taxable event. Whenever you earn (or lose) money selling your NFT, it’s taxable. Plus, your NFT royalties are also taxable income.

How to File Taxes For Crypto

The first steps involve figuring out how much money you made or lost and the right IRS file to use. The tax on capital gains is the difference between how much the cryptocurrency costs to buy and how much it costs to sell. 

You need to know when you sold and bought crypto, how much you sold it for, how much you bought it for, and how much you made or lost. A few essential tax forms may be needed, such as Form 8949 for reporting the sale of assets and Form 1099-B for disclosing the sale of assets on an exchange. 

And while Form 8949 is used to report each transaction separately, a Schedule D declaration is needed to document net gains and losses. The total then goes on Form 1040. Then there is the possibility of making money from cryptocurrency. 

For example, people who mine as a hobby need to fill out Form 1040 Schedule 1 (about extra income) and Schedule A (about expenses). On the contrary, business miners use a Schedule C for both (losses and profits earned from their businesses.)

How Do You Calculate Your Crypto Taxes?

Each time you do a crypto transaction, you only need to apply the formula below to determine your capital gains and losses:

  • Fair Market Value – Cost Basis = Capital Profit/Loss

What is the meaning of “fair market value”?

Fair Market Value is just the price at which an asset would sell on the open market. When talking about cryptocurrency, this is usually the selling price in U.S. dollars.

What Cost Basis Means

The cost basis is the amount of money you spend to acquire a property (i.e., indicating its cost to you). To determine your capital gains and losses incurred from trading crypto, you need to keep a log of your fair market value, cost basis, and USD gain or loss for every transaction (spend, sell, trade, etc.). 

If you don’t have this data, you can’t figure out how much money you’ve made from trading and declare it on your taxes or reduce the amount you pay. 

Ways to Pay Less Tax on Your Cryptocurrency

You can lower your tax bill in many ways, such as keeping your money for a long time, crypto tax-loss harvesting (which means lowering your tax bill by subtracting any capital gains with capital losses), and taking charitable deductions. 

Using a retirement plan can delay or stop investment gains, but it can be more complicated than investing via an exchange. Some users have also been able to fight IRS notices, which they got when there was a difference between what they said and what a crypto exchange said. Last but not least, you can use the cost-basis method to reduce your crypto tax obligations in the most advantageous way possible.

Conclusion

The whole ecosystem of cryptocurrencies is still young. As the industry changes, more rules and laws will come into play. Even if you aren’t doing anything too complicated with crypto and have questions about your tax obligations or aren’t sure if you’re filing the right way, you might want to work with a tax specialist who has expertise in figuring out the tax code applies to virtual currencies. 

The IRS and other regulatory agencies can’t advise on every possible situation a taxpayer might face, which leaves many gaps in the advice already out there. Therefore, it is essential to find a tax expert who is knowledgeable about the IRS’s current instructions and has expertise in reporting cryptocurrency earnings and losses. Make sure potential tax professionals are aware of the ambiguities in the tax code by asking if they have any virtual currency of their own.

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