Why is it more important than ever this year for investors to comply with IRS taxing standards?
The government has taken notice of the rise in cryptocurrency investments in the recent year, sending public notifications outlining their regulatory activities.
Many government agencies have cracked down on investors in the last year as a result of the rise in bitcoin transactions.
The recent tax shortfall, according to the White House and Democratic senators, is mostly due to the crypto economy and prior low reporting standards.
Several fiscal government organizations received letters earlier this year emphasizing the necessity of tax reporting and asking information on data maintained by a bitcoin exchange.
The desire for further regulation may now be seen in the obligation to answer “yes” or “no” to a question on a tax form about bitcoin transactions throughout the year. The investor may face hefty penalties if he or she fails to report this information and related income.
How do you file your cryptocurrency taxes?
Before picking their filing status, deciding how they will file their taxes, determining if they will take the standard deduction, and making a payment if it is needed, investors must compute their net gain or loss.
Users can calculate their earnings and losses themselves or consult a tax-planning specialist to file their taxes. Individual investors must file IRS Form 8949 to report capital gains and losses. The cumulative gains and losses are added together to arrive at a net capital gain or loss. This sum is then combined with an investor’s total income from other investments, such as stocks, to create Form 1099-B. The information on this form will be used to prepare Form 8949 by a tax professional, CPA, or software filing solution.
Exchanges will often provide 1099-B Forms for bitcoin trading transactions, which investors can cross-reference with Form 8949. Only when there are differences in values do problems occur, culminating in audits or a CP2000 warning.
Following the completion of these computations, investors can proceed to the next steps in the tax filing process. These procedures include selecting on a filing method (the IRS normally suggests using tax preparation software to e-file), deciding whether to file a standard deduction or an itemized return, and making a payment if one is due.
What makes it tough to manage cryptocurrency taxes?
Cryptocurrencies are taxed differently than traditional assets, resulting in a difficult tax season due to a lack of CPA resources with significant knowledge of bitcoin taxation.
The existing structure is difficult to navigate since the IRS classifies cryptocurrencies like Bitcoin (BTC) and nonfungible tokens (NFTs) as property rather than assets. Because different regulations apply, investors frequently need the assistance of a professional or appropriate crypto tax software to properly document this transaction.
Other restrictions complicate the management process by implying that using fiat cash (dollars) to buy assets in 2021 doesn’t necessitate a tax return entry at the time of writing.
However, if you’re selling or exchanging the same virtual currencies, you’ll need to file a report. As a result, for individuals that conduct a lot of trading or have a lot of various currencies, the sheer amount of data to sort through might add to the complexity.
While using a tax professional to aid with some of the more technical intricacies connected with tax administration has been an option in prior years, the last year has seen a large number of tax professionals quit. Investors are frequently left on their own when it comes time to calculate taxes due to the COVID-19 pandemic, which has resulted in more claims of burnout and overtime hours.
How can I use cryptocurrency to improve my tax returns?
Several optimization solutions are available to investors, including the 0% tax rate on long-term gains and HIFO procedures.
Investors can take advantage of a number of tax-saving possibilities, including the 0% long-term capital gains tax rate. A somewhat lesser-known 0% tax rate exists in the United States’ tax code for certain long-term gains.
Up to $80,000 in profits can be gained without paying taxes depending on an investor’s filing status, annual income, and the length of time a digital asset has been sold.
For particular identification, another option is known as the highest-in-first-out method. This strategy is more time consuming since it requires users to choose the item with the highest purchasing price. Users can then designate these units as the products being sold, resulting in the smallest gain and, as a result, a lesser tax payment.
How might crypto be used to harvest losses?
To boost an investor’s tax return, subtract net losses from earnings generated through cryptocurrencies.
Many people will use a practice known as tax-loss harvesting to offset some of the taxes they will pay as a result of investing. When it comes to harvest losses, investors watch for dips in bitcoin prices to see if the sale of digital assets falls below their cost base. These losses can be offset by capital gains, lowering a taxpayer’s overall tax bill.
How can I make the tax filing process easier for myself and my CPA?
Users can build a crypto tax report for their nation using specialized cryptocurrency tax software, which can also generate Form 8949 and other files for e-file submission or to submit to their CPA.
To make an investor’s or a CPA’s life easier, cryptocurrency traders might begin by compiling all of their crypto transaction reports over the course of the year. Accounting and other modern crypto tax software solutions automate this process to cut down on the time it takes to compile these documents.
Over 400 integrations, many of which are well-known cryptocurrency exchanges, are consolidated into a single view on the Accounting platform’s mobile app or desktop. With a cohesive set of data, users can calculate their total wins and losses for the year, providing the basis for a customized tax report for a CPA in a few minutes.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.