We are in the midst of the typical American’s least favorite time of year: tax season. Taxes are always considered a headache, sending one digging through that old filing cabinet and filling out form after form. However, this year is a bit different, and it could make for a bigger headache for some investors. As cryptocurrency continues to blow up in popularity, more people are investing in the digital currency space. But, these new investors might not know the ropes of crypto taxes.
Crypto, while still unregulated in the U.S., has stringent tax-reporting rules. These rules can often sow great confusion, which only adds to the confusion new investors already have when starting to invest in cryptocurrency. But fear not; things aren’t as difficult as they seem. Here are some important things to know before you file your taxes this year.
Paying Your Crypto Taxes: What to Know
- There are three different taxable events one must include in their crypto taxes. The first of these is capital gains. The Internal Revenue Service (IRS) treats crypto gains just as they treat stocks. If you bought crypto in the last year and sold that cryptocurrency for fiat — be that USD, Euros or anything of the like — you need to report the transactions.
- This being said, simply buying crypto with fiat and holding it is not taxable; if you are a die-hard “hodler,” who hasn’t transacted their assets at all since investing, you needn’t include those assets on your filings.
- The second of these taxable events is crypto swapping. Indeed, when you trade your crypto for any other crypto, you must report the swap. This goes even for transactions that don’t involve any type of fiat currency.
- The last of these events is conducting transactions with crypto. Every time you use a cryptocurrency to pay for a good or service, you should keep records of these transactions; the IRS counts these events as taxable. For example, if you purchased something even as simple as a cup of coffee with crypto, you should keep that receipt.
- And if you’re a DeFi investor who thinks they won’t have to pay crypto taxes on their unsold staking rewards, think again. The IRS has been taxing DeFi rewards for years already.
- Recent news might suggest that this is changing; one couple received a refund from the IRS after a long court battle over whether their staking rewards were taxable. However, some tax experts claim this recent development does not change how you should file your own taxes this year. As such, it is imperative that you include staking rewards in your tax report. This goes too for rewards that are unsold, unlike assets that were bought on an exchange.
- Also, if you’re one of the many millions who invested in non-fungible tokens (NFTs) last year, there’s a chance you could pay taxes on them. Just as with crypto capital gains, one must only pay taxes on an NFT if they sold that NFT for a profit.
- Lastly, if you’re an unlucky investor who sold crypto assets for a loss in the last year, there’s still a bonus in it for you. Investors can deduct up to $3,000 in losses on their crypto taxes, helping to ease the pain a bit.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
