The US Government has issued a cryptocurrency and Bitcoin tax guide for investors and taxpayers
Cryptocurrencies were originally meant to be stateless entities, not beholden to the legal frameworks of any state or country. However, the traction for cryptocurrencies is now witnessing new highs, bringing in increased government interference, censure, and cynosure. Several countries and large tech companies have now accepted that cryptocurrencies will continue to be a part of the global financial and economic infrastructure. Countries like the United States have also taxed cryptocurrencies, where the government circulated cryptocurrency and Bitcoin tax guide to becoming one of the top countries regulating the use and transactions through cryptocurrencies so that its citizens can safely reap the benefits of digital currencies without getting scammed or tricked into taking the wrong decisions by the wrong people. The IRS has established several frameworks and measures to ensure safe cryptocurrency practices. Since Bitcoin went mainstream in America, the regulators sought it necessary to implement federal-level cryptocurrency legislation. The IRS does not consider cryptocurrencies to be legal tender but considers them as the digital representation of value that functions as a medium of exchange, and a store of value. Recently, the Government is taking several measures to ensure that the US taxpayers are well-aware of the different procedures involved in cryptocurrency taxes. So, it is imperative the taxpayers and crypto investors very minutely understand and go through the cryptocurrency and Bitcoin tax guide to make sure that they are right every step of the way.
Any US citizen that dabbled in cryptocurrency over the 2021 tax year will now be expected to file a tax return to the IRS. US taxpayers can file their taxes within the deadline, with penalties issued for submissions made after the deadline. Coming to the state of cryptocurrencies in the United States, NFTs are currently treated as properties for the purpose of taxes. This was originally regulated by the IRS in a notice published in 2014, which also indicated that a majority of taxable actions involving digital assets will incur capital gains tax treatment, quite similar to how financial stocks are taxed.
When to File Cryptocurrency Trades on the Tax Returns?
To understand the basics of cryptocurrency tax, investors need to first understand when they really need to file taxes for cryptocurrency investments. Firstly, simply buying virtual currencies with US dollars and keeping it within the exchange where they made the purchase or transferring it to their personal wallet does not mean that they are subjected to taxes. Cryptocurrencies start becoming taxable after they use crypto as a method of exchange. This includes selling the crypto for US dollars, exchanging one cryptocurrency for another, and then buying another cryptocurrency to pay for goods or services.
Similar to cryptos, NFTs are also taxed, but since, the IRS has not yet released any specific tax guidance on NFTs, it can be a little confusing to explore. But if investors are creating or minting NFTs, then it is crucial to know how NFTs are taxed that they will be subjected to long-term or short-term taxes based on the nature of investing and according to the gains tax rate.
How are digital currencies taxed in the US?
In 2014, the IRS issued a notice to clarify that virtual currency is treated as property for tax purposes, cryptocurrency is taxed as a capital asset and the gain or loss of every taxable event must be reported in Form 8949 of the IRS that denotes the cryptocurrency tax form. Then, from 2019, the IRS started asking taxpayers about their virtual currency activity on their tax returns, so that there is no room for taxpayers to claim that they were unaware that cryptocurrency transactions needed to be reported. If the taxpayer fails to report their cryptocurrency taxes, the IRS may impose penalties based on the nature of transactions.
Furthermore, selling or investing in crypto can incur capital gains tax. But the IRS also distinguishes between short-term and long-term gains that are death differently. Just like any other asset investment, losses can be offset against gains. Paying for goods or services using cryptocurrency also generates capital gains if the person making the transaction profited from the difference between the price of the goods or service and the purchase price of the used cryptocurrency.
Bottom line, what is the state of crypto taxes in 2022?
Inflation is running at a four-decade high in the US, and the IRS has responded by making wide-ranging adjustments that affect crypto investors. In the coming year, crypto tax regulations could become even more pervasive. This could become a reality in the form of tightening reporting rules around DeFi, airdops, hard forks, and reporting rules for privately held wallets. There are several intricate ways through which taxpayers have to file their cryptocurrency transactions. Currently, it is crucial to take help from professionals if needed and understand the repercussions of taking a single wrong step in order to avoid trouble from the IRS.
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