Just to clear the air, cryptocurrencies are considered property to the IRS and are taxable in the same way that gold and stocks are. This also applies to all NFTs including NBA Top Shot, and other digital collectibles. If you've invested in crypto in 2021, here's what you need to know about crypto taxes in 2022.
When Do I Pay Taxes on Crypto?
The short answer is that anytime you’ve made any capital gains or earned more crypto, you’ll have to file it with the IRS.
Just as when you profit from selling stocks, you must pay taxes every time you trade a coin or cash out for a profit. This means if you trade your Bitcoin for Ethereum or liquidate your coin, you’ll pay taxes on the gains. It's important to note that your tax bill largely depends on how long you hold your crypto assets. Specifically, if you sell your crypto within a year, the gains will be taxed as "short-term capital gains", and the rate is significantly higher than “long-term capital gains”.
Any crypto that is earned via mining is considered a taxable income and needs to be filed with the IRS even if you don’t get a Form 1099 for earning that coin. To keep your filing straightforward, track how much of a coin you mine in a day and the fair market value of that day. You’ll report that information on Form 1040 just as you do for other incomes.
Similar to stock dividends, some cryptocurrencies offer “staking”, which rewards bonus crypto to investors who hold their coins longer. In February 2022, a legal precedent declared that unsold staking rewards are not taxable. For the average crypto user, you only have to pay taxes if you sell the rewarded coin for a profit.
Can I Hide Crypto Profits From the IRS?
The simple and honest answer is absolutely not. Although cryptocurrencies are better at maintaining privacy than other financial options, the IRS is notorious for being relentless. Part of the security of a cryptocurrency is the power of blockchain technology, which allows for all transaction logs to be decentralized. While this is great for security and ensuring transactions are handled honestly, those logs can be traced back and you’ll eventually be held liable.
However, there are ways to legally minimize or avoid paying taxes on crypto, such as purchasing crypto through an IRA. These methods are mostly niche, but one of the most viable ways is tax-loss harvesting. Losses can be used to your benefit by offsetting up to $3,000 a year to pay less taxes. People usually do this to mitigate their short-term capital gains tax.
And with the IRS really cracking down on crypto taxes this year, it’s a bad idea to hide anything from the Taxman.
What’s the Future of Crypto and the IRS?
It seems that cryptocurrencies will continue to grow as an alternative investment for many. Trends show that more people invested in crypto last year than all the previous years combined. What does this mean for taxes on crypto? As the total investments in crypto assets grow, new laws will be enacted to regulate the markets. By April of 2023, there’s a high likelihood that this article will become dated as soon as the next tax season rolls around.
It may seem overwhelming to manage crypto taxes, a licensed CPA or tax software like TurboTax and H&R Block can help streamline your filing. Otherwise, you’ll need to file 1040 forms when you make trades or when you cash out. The IRS has a great FAQ to help you navigate your filings this year.
Using a VPN won’t help you avoid paying taxes on your crypto, but we still recommend using a VPN for crypto transactions. It encrypts your online traffic for whenever you log into your wallet and masks your online traffic to protect your crypto activities. A VPN also lets you use global servers to bypass certain restrictions and access international crypto markets. You can sign up with VyprVPN today for a risk-free 30-day money back guarantee.