Tax day is less than a week away, and if you haven’t filed your taxes yet – you should know that the Internal Revenue Service is keeping a close eye on crypto and NFT buyers.
According to a survey from crypto portfolio tracking and tax software company CoinTracker, nearly 40% of crypto investors didn’t know that their transactions were taxable. As of March 27, 96% of the population of crypto investors had not filed their tax returns.
This is a cause for concern because cryptocurrencies are taxable as long as you made money on any transactions, according to the IRS. While the tax agency hasn’t issued much guidance on virtual currency, it considers cryptocurrencies as property – meaning your digital currency will be taxed in the same way as any other assets you own.
“Since 2019, our IRS hasn't issued any new guidance. In 2022 tax forms, we continue to see that infamous crypto tax questions on the front and center of the Form 1040. And that's a question that every taxpayer needs to answer going forward,” Shehan Chandrasekera, CoinTracker’s head of tax strategy told Yahoo Finance Live.
As more Americans enter the market, many may ask themselves what activities need to be reported to Uncle Sam. Here are some tips crypto investors and NFT creators should know before filing their returns next week.
Yes, getting paid in crypto is taxable
As cryptocurrencies gain popularity, it’s become more common to see some employers pay with virtual currency – such as NFTs, bitcoin or ether.
If you’re receiving your salary in crypto, your wages will be subject to federal income tax withholding, according to the IRS.
Crypto is volatile in nature, meaning if your employer paid you $2,000 in bitcoin a few months ago – the value can go up or down by the time you have to file your taxes. That’s why it's crucial that you keep track of the fair market value of the crypto you received to be able to file your returns, said Chandrasekera.
There are several online resources you can use to keep track of your digital crypto assets, including CoinTracker.
“You see some of the athletes getting paid in crypto as well. If the employer were to do this correctly, your crypto wages should be included on your form W-2,” Chandrasekera said. “So as the taxpayer, I don't have anything new to do other than just inputting my W-2 into a tax software or just giving it to the CPA. But there are some situations where your employer pays in crypto directly. But they don't report that to you in any form of tax form like a W-2.”
If your employer failed to give you a W-2, the responsibility of tracking your wages in crypto will fall on you. This may be the case if you’re a freelancer, for example, or were paid in crypto a handful of times for services rendered.
“In that case, you have to keep track of each coin that you receive, at what time you received it, and the market value each time you receive those points,” Chandrasekera said. “Because every day, every second has a different value. So you need these detailed records to kind of figure out your income to be reported on the tax form.”
How to save on taxes as a crypto investor
When it comes to taxation, there are four taxable events crypto investors should keep an eye on aside from your wages.
First, if you have bitcoin that appreciates in value and you cash it out, you’ll be subject to taxes. Converting one coin to another (for example, BTC to ETC) will also create a taxable event, even if you don’t cash it out, Chandrasekera said. Additionally, using your cryptocurrency to buy a good or service and receiving crypto as a result of a fork or mining are both taxable events.
Fortunately, there are ways to save on taxes if, as a crypto investor or NFT creator, you triggered any of these taxable events.
“If you have any coins or NFT that are below their cost basis, in other words, let's say, you pay like $50,000 for bitcoin, but now it's trading at $30,000, for example, what you can do is you can sell that coin and harvest that $20,000 worth of losses and get back into the same coin within a reasonable period of time,” Chandrasekera said. “So when you do this, we call this tax harvesting.”
Tax harvesting will benefit taxpayers because it will reduce your taxable income. It will also allow you to claim some losses.
One crucial factor to remember is that you should file taxes on any capital loss in any given year. According to Chandrasekera, you can claim up to $3,000 worth of losses in any given year. If your losses exceed $3,000, you can carry excess losses forward into future years and use those losses to offset any gains. According to Chandrasekera, crypto investors should consider harvesting their taxes every month or every other week – if they can.
“Another way to kind of save on your taxes, if you really want to sell coins, make sure you sell the coins that you have held for more than 12 months,” Chandrasekera said. “When you do that, you're going to get taxed on the most preferable long-term capital gains tax.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.