Cryptocurrency Tax Obligations – Professional Tax Services

Chances are many of you have recently entered the cryptocurrency market or are considering it. Unfortunately, cryptocurrency transactions are taxable. Thus, we feel it imperative to ensure those of you who are trading cryptos or planning to are informed about your tax obligations.
Cryptocurrency tax burdens are complicated. Therefore, we can only provide some basics here. If you know little about crypto taxation, but are or will be investing, discuss your situation with your tax professional soon to make sure you correctly comply to avoid headaches and heavy penalties.
Keeping Records
Because the cryptocurrency market is rapidly growing, the IRS is increasing their enforcement of tax reporting. Thus, you must keep accurate records of every transaction, whether it be purchases or sales, and accurately report this information to the IRS using the correct tax forms. If you trade on an exchange, the IRS does have ways to track your transactions by using blockchain analytical tools that identify crypto activity of digital wallets, and tying them to individuals and their transactions.
Tax year 2023 is the first year that exchanges, such as Coinbase, are required to send form 1099-B to everyone transacting through the respective exchanges. Therefore, you must report all crypto exchanges and sales on your taxes. Penalties for failing to report can be as high as 75 percent of profits. To levy this penalty, however, the IRS must prove deliberate fraud. Unfortunately, failing to fully disclose on your tax return is also a criminal offense. Investors must report all transactions, no matter how small.
Crypto and Capital Gains
The IRS considers digital assets as property rather than currency. Thus, most crypto transactions are subject to capital gains. The IRS differentiates profits when selling crypto from profits of other crypto activities, such as airdrops and staking, which we are not addressing here. Taxable actions include trading of digital assets for another, selling digital coins for dollars, and using digital coins to purchase goods or services. Only those digital assets you have disposed of or sold for a profit are taxable. The IRS considers assets held for less than a year as short-term capital gains and are taxed at a higher rate than assets held for more than a year, which the IRS regards as long-term capital gains. Paying wages in crypto is also subject to taxes at the same rate as wages paid in dollars.
What Should You Do?
If you are engaged in frequent transactions, contact your tax professional for guidance. We provide complimentary tax planning advice to our clients.
Professional Tax Services is a locally-owned provider serving over 3,500 local residents and businesses. For more information, call 661-259-1967 or visit www.scvprotaxservices.com.