Ask any crypto tax expert and they’ll attest to the complicated nature of crypto taxes. Amid the constant regulatory updates, IRS enforcement is ramping up month after month. As a result, even genuine oversights such as a missing NFT sale can result in penalties. In general, the more complicated the crypto activity, the more complicated the return. As I’ve outlined in a recent article, complex transactions can even lead to errors within high-rated crypto tax platforms.
In many cases, hiring a crypto tax accountant can alleviate the burden of navigating crypto tax law. Whether you seek out professional support or decide to DIY your crypto tax return, understanding the ins and outs of the law is key. Here are just a few of the core intricacies that savvy individuals and businesses should know.
Categorizations as Ordinary Income
In general, crypto income is taxed using the same structure as salaries, business profits, or self-employment income. Whether you’re lending out cryptocurrency in exchange for interest, mining new coins, accepting crypto as a form of payment, staking to earn rewards, or beyond, these gains are subject to ordinary income tax. Here, the tax rate depends on several factors including filing status, taxable income, and more.
Categorizations as Capital Gains
As with stocks, crypto gains sold within 12 months are subject to a higher tax rate (short-term gains) while holding periods over 12 months enjoy a lesser tax rate (long-term gains). Likewise, losses can take advantage of tax loss harvesting, thereby reducing your overall tax burden. For example, a purchase of BTC for $10,000 that is sold for $8,000 would appear as a capital loss of $2,000. Cryptocurrencies that are held, however, will remain as unrealized gains or losses. Of note, short-term crypto gains follow the same tax structure as ordinary income.
DeFi Taxes & Reporting
DeFi tax laws and regulations are consistently on the move. Failure to report and pay these taxes can lead to lofty 25% penalties on a monthly basis for late payments — or even jail time. One of the most common misconceptions surrounding DeFi is that these exchanges are not traceable since they do not report to the IRS. Although the latter is true, your DeFi activity is in fact traceable by the IRS. Here, lenders will pay capital gains tax on any sold cryptocurrency collateral. Meanwhile, wrapping coins on a decentralized exchange is taxable. The same is true for deposits into liquidity pools.
From governance tokens to NFTs to yield farming, the complexities surrounding DeFi oftentimes go beyond crypto tax platforms, as I have outlined in a recent article. As a result, hiring a crypto tax expert to keep your returns in compliance can help prevent audit red flags and costly penalties.
Understanding Your Options
For many individuals and businesses, the complexities of carrying out a DIY crypto tax return or relying solely on a crypto tax platform come with inherent risks. In turn, savvy decision-makers turn to a crypto tax accountant for the confidence that comes from compliance. For more information surrounding the intricacies of cryptocurrency taxation, I encourage you to read my other articles.
When the time is right to put an experienced crypto tax expert in your corner, I invite you to explore my website. There, you can learn more about my borderless crypto tax services. Thank you for reading.