Will This Tax Season Worsen The Bitcoin Taxes Scenario?
The Internal Revenue Service (IRS) has recently stated that the 2022 tax season will begin on January 24, 2022, when the agency will proceed with filing tax returns for the year 2021.
Although filing crypto taxes is a simple process, it can be quite a task for a large number of new investors who flocked to the crypto market for the first time in 2021. Reports have pointed out that more than half of existing Bitcoin investors started investing in the last twelve months.
Throughout 2021, the crypto market achieved many all-time highs and lows, resulting in big gains and losses for many investors. So the most important question on every taxpayers mind will be if there are any changes in Bitcoin taxes, laws, and regulations in the 2022 tax season? Will the 2022 tax season worsen the bitcoin taxes scenario? Lets find out.
IRS Update On Tax Season 2022
In Notice 2014-21, the IRS had mentioned that whenever cryptocurrency is traded or sold for a profit, it will be liable to capital gains tax, similar to property. This capital gains tax can be sub-divided into short-term and long-term capital gains, according to the holding period of the asset. Apart from that, there are also various cryptocurrency events that are categorized under income taxes.
So what changes can we expect in the 2022 tax season?
Starting in 2022, the Internal Revenue Service (IRS) is expected to shut a long-awaited tax limitation that allows bitcoin investors to harvest losses to lower their tax burden.
Wealthy investors dreading a tougher tax system this year are hitting digital currencies. The closing loophole may aggravate the situation.
Cryptocurrencies and equities have been crushed, considering the virus Omicron version concerns the markets will be taken over again. As short-term fluctuations represent crypto trading, fiscal positioning towards the end of the year may also be of significant importance.
Moving To A Smarter Crypto Investment Plan
Buy high and sell low isn’t the best investing approach, but there is a smarter investment plan with cryptocurrency. Smart investors can leverage their tax refunds by selling off crypto at a loss and quickly buying it again.
Capital gains are taxed under the “wash sale” rule on bonds, stocks, and other instruments, but not on cryptocurrencies.
As a result, smart investors have been able to sell sinking investments, utilize the loss to offset income or some other capital gains taxes, and then buy back in at a reduced cost basis within a much shorter span of time. Lets understand this with an example:
Tim paid $31,500 for 1 BTC in June 2021. He notices that the price of bitcoin has dropped to $29,000 and sells one bitcoin. He lost $2,500 in the market.
She spends the $30,000 on another BTC, which he now keeps.
This financial year, Tim has also invested in ETH. He paid $1,500 for one ETH and afterward sold it. On the day he sells, the price of ETH is $3,500. So, he has made a $2,000 profit.
Tim may use his BTC capital loss in order to offset his ETH capital gain, so he won’t have to pay any capital gains tax on his ETH gain.
Bitcoin Taxes: Tax Filing In 2022
The IRS categorizes cryptocurrency as property. So when it is traded or sold for a profit, it may be liable to capital gains taxes.
If you swap digital currencies, cash out to US dollars, or make a transaction, it might be a taxable event.
So, how can you calculate your taxes?
The price at which you buy the assets is known as the cost basis. Fair market value on the other hand is the fair market value is the sellable price on any particular day.
The difference between the cost basis and the value on selling or exchanging is the capital gain or loss. The tax rates are based on how long you’ve had the assets. This has two sub-categories:
- Short-term capital gains
- Long-term capital gains
If you retain the currency for 366 days or more, you will be eligible for long-term capital gains rates ranging from 0% to 20%, depending on your taxable income.
Short-term capital gains, on the other hand, are taxed at standard income tax rates, up to 37% for individuals in the higher tax slab, if assets are sold or exchanged after less than 365 days.
Calculating Bitcoin Taxes
The worst situation to be in just before the tax season is to not have any records of your transactions.
If the exchanges don’t supply Form 1099-B, you could have to rely on each broker’s database of transactions or alternative reporting choices, which might be hard to combine.
What you can do at this point is take the help of cryptocurrency tax reporting software and get a detailed account of your crypto transactions.
The deadline for submitting Form 1099-B is January 31. This form is used by brokerage firms to report an investor’s earnings and losses. However, it’s unclear whether any crypto exchanges would deliver these forms in 2021.
Despite the IRS’s restricted reporting requirements, you must nonetheless disclose crypto transactions.
The Bottom Line
Consider consulting with a tax expert who has experience with bitcoin taxes, even if you aren’t doing intricate crypto transactions and only have questions about your individual tax liability or aren’t sure whether you’re reporting accurately.
The IRS and other agencies are unable to provide guidance on every circumstance that a taxpayer may face, and there are several gaps in present guidance. That’s why it’s crucial to hire a tax advisor who is up to date on IRS regulations and has expertise in reporting bitcoin earnings and losses.
FAQs
- Do you have to pay tax on bitcoin?
Yes, transactions related to Bitcoin and other cryptocurrencies are subject to taxes. They can either be categorized as income taxes or capital gains taxes depending on the source. Further, the capital gains tax can either be short-term or long-term depending on the holding period of the asset.
- Do you have to report bitcoins to the IRS?
Yes, you have to report all your crypto transactions to the IRS for tax purposes. The IRS considers cryptocurrency as property and your bitcoin taxes rates depend on the holding period of assets. They can either be short-term capital gains tax (ranging from 10% to 37%) or long-term capital gains (ranging from 0% to 20%).
- How do I file taxes with cryptocurrency?
Cryptocurrency is often referred to as a virtual currency, although it is not real money in the perspective of the IRS. Cryptocurrency is considered property by the IRS, according to IRS Notice 2014-21, and capital gains and losses have to be reported on Form 8949 and Schedule D as applicable.