CNN — NEW YORK (CNN) — If you are a cryptocurrency investor or are paid for services in Bitcoin or other virtual currencies, you need to report taxable transactions on your 2023 tax return. Yes, that’s the deadline for most people. April 15th.
And, of course, you will also be liable to pay taxes on any income or profits you earned from your crypto assets in the last year.
The problem is that questions remain about the rules for filing tax returns and the calculations needed to complete them.
For example, 2023 was supposed to be the year that third-party reporting requirements for crypto intermediary platforms to report their customers’ transactions to the IRS would go into effect, but the IRS will not enforce these rules until the Treasury Department issues a report. The enforcement of the law has been temporarily suspended. Miles Fuller, senior director at taxbit, a cryptocurrency tax advisory firm, said of the final regulations: Fuller previously worked for the IRS as a senior advisor specializing in virtual currency issues.
Despite your temporary suspension, you may have received tax forms from some third parties. But even if he doesn’t, he still needs to be honest with the IRS about his cryptocurrency transactions. “It’s still your responsibility to make sure you report the information,” Fuller said.
What to do
First, that means answering the following questions on the first page of the federal 1040 tax form. or (b) sell, exchange, or otherwise dispose of the Digital Assets (or a financial interest in the Digital Assets)?”
If these descriptions reflect the nature of cryptocurrency trading, please answer “yes”. But if you just bought or held digital assets, you can answer “no.” Or you just transferred digital assets from one of your accounts to another, since it’s not taxable.
If your employer or customer pays you in cryptocurrency, you are liable to pay income tax on that payment. That value is determined by the price of that cryptocurrency on the day you were paid, Fuller said. Cryptocurrency is not legal tender, but for compensation purposes, it is taxed as if the payment were received in dollars. The company that paid you may have sent you a W2 form if you were a legal employer or a 1099 form if you were a contractor or freelancer.
If you sell your cryptocurrencies in 2023: You will need to calculate whether there was a capital gain or loss. In other words, what is the difference between the value of a cryptocurrency on the day you buy it (cost basis) and the value on the day you sell it?
If you lose money, even if it’s from the sale of another security or another property like a stock or a home, you can use that capital loss to offset any capital gains you realized last year. If you still have losses after offsetting your gains, you can use them to offset taxes on up to $3,000 of your 2023 ordinary income. Any remaining losses beyond that can be carried forward and applied to future tax years.
If you sell Bitcoin during the so-called virtual currency winter of 2022, you may have recorded a large capital loss, and remember that the amount that could not be used for taxes in 2022 can be applied to your 2023 tax return. Put it down please.
Instead, if you made money selling or exchanging cryptocurrencies last year, you realized a capital gain. If he holds the digital asset for less than one year, it is considered short-term gain and is taxed at ordinary income tax rates. If held for more than a year, it becomes a long-term gain and is taxed at lower capital gains rates. This ranges from 0% to 15% for most people, depending on their income.
When you use cryptocurrency to buy goods and services: Let’s say you bought a car with Bitcoin last year. If it’s worth more than $10,000, the car dealer will file Form 8300 with the IRS reporting your transaction.
You may also be required to report capital gains or losses from the transaction. Let’s say you received a payment of $10,000 in Bitcoin from a customer or employer. That can be declared as income. Now suppose that $10,000 increases to her $20,000, which she uses to buy a car. Capital gains of $10,000 must also be reported ($20,000 – $10,000).
If you donate virtual currency to charity: The value is based on the price of the virtual currency on the day the transaction is made. However, if you estimate its value to be more than $5,000, as with most other personal property gifts over $5,000, you must pay a qualified appraiser to formally calculate the value of your gift. Fuller said there is. “If you can’t get an evaluation, you can’t get a deduction.”
What about investing in Bitcoin ETFs?
In January of this year, the Securities and Exchange Commission finally gave the green light for the listing and trading of 11 Bitcoin exchange traded funds (ETFs).
Currently, if you own cryptocurrency directly, it is treated as personal property for tax purposes. However, if you decide to gain exposure to Bitcoin through an ETF, you will not directly own any Bitcoin and the ETF will be taxed as an SEC-regulated financial instrument.
Therefore, if you purchase a Bitcoin ETF this year, you and the IRS will receive a form from the broker-dealer that holds your ETF account reporting your transactions in 2024.
What’s not clear yet is if you own a Bitcoin ETF, do you need to check “Yes” on the first question about digital assets on your 1040 form, since you don’t directly own the Bitcoin ETF? Please, said Mr. Fuller.
We’ll likely have an answer by next January, when filing season for the 2024 tax year begins.
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