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One of the most essential things to keep in mind when you begin trading in cryptocurrencies is that it is your obligation to maintain track of any potentially taxable transactions, as well as the market value of your bitcoin during those operations.
The IRS only provides broad guidelines for the data you’ll need to preserve for tax reporting: they should be enough “to demonstrate the stance held on tax returns.” Logs of any time you receive, sell, or trade virtual money, and also the fair value of your virtual currency, are some of the examples given by the agency.
The year 2021 was a watershed moment for cryptocurrency, with a slew of new investors flocking to the market for the first time. According to a recent analysis by Grayscale Investments, more than half of existing Bitcoin investors started investing in the previous 12 months through bitcoin wallets. Throughout the year, the crypto market achieved many all-time highs and lows, resulting in big profits and losses for several investors.
Some exchanges may send you a Form 1099-B to assist you to figure out your profits and losses, although this is rare. Finally, you’re in charge of keeping track of your financial activities and the fair market value of your currency.
That probably won’t happen for the 2023 tax year, according to projections. Brokers — called bitcoin exchanges — are required to send a 1099-B under a clause of the $1.2 trillion bipartisan infrastructure plan signed into law by President Biden last November. In other words, digital exchanges will be compelled to report crypto transactions to the IRS immediately.
It’s usually simple to track or produce information about your bitcoin transactions using a wallet, if you keep your virtual currency in your account on the exchange where you bought it. However, if you transfer your cryptocurrency between bitcoin wallets or have it in numerous locations, you’ll need to be more cautious about keeping track of it.
You may utilise crypto-focused tax software applications to make the procedure easier. The programme will create the cost basis for your trades and assist you to assess your capital gains and losses if you enter data on all of your bitcoin trades or revenues across all exchanges you’ve used through your bitcoin wallet. CoinTracker, TokenTax, CryptoTrader.Tax and others are compatible with traditional tax software like TurboTax or TaxAct.
Start preparing ahead now to make your crypto-related 2021 tax file as simple as possible. Even if that’s how you usually approach tax season, don’t wait until April 1, 2022, to start compiling your records and calculating out what you owe.
Think about working with a tax expert who has experience reading tax codes connected to virtual currencies, even if you aren’t doing intricate crypto operations and only have questions about your individual tax liability or aren’t sure whether you’re reporting appropriately.
The IRS and other agencies are unable to provide guidance on every circumstance that a taxpayer may face, and there are several gaps in present guidance. That’s why it’s critical to hire a tax expert who is up to date on IRS regulations and has experience reporting bitcoin earnings and losses. Ask potential tax advisors whether they possess any virtual currency and if they are aware of the tax code’s ambiguities.