Tax season is upon us, and with the growing popularity of cryptocurrencies like Bitcoin, more investors are looking to get in on the action. According to a 2021 Pew Research Center survey of U.S. consumers, 18% of Black adults had invested in, traded, or used a cryptocurrency compared with 13% of white adults. It is important all demographics understand taxes but as the crypto market continues to grow, so does the number of challenges investors face like understanding crypto taxes. In this blog post, we’ll explore cryptos passing the Howey test as a commodity or security and offer some advice on how to stay ahead of the curve when it comes to your taxes.
Crypto as a Taxable Commodity or Security?
Tax payers don’t need to determine when a crypto is a security or commodity, the IRS has deemed all cryptocurrencies as property (even if it doesn’t make sense!) In layperson’s terms, Security produces a return from a joint enterprise or company. Commodities are typically “basic goods” that can be bought, traded, or exchanged — think grain, beef, or gold. The battle to determine what the thousands of cryptocurrency projects out in the market categorically falls into is ongoing.
The answer isn’t always clear-cut, but there are a few things you can look at to help you decide. The Security and Exchange Commission takes care of securities, so the general public does not get financially injured by nefarious investments such IPOs. The Howey Test is a key legal precedent for assessing whether transactions should be considered securities. Developed by the U.S. Supreme Court, this test determines if an “investment contract” exists based on criteria such as money being put into a common enterprise with hopes of securing future profits from the work of others.
Gains/losses occur when selling, exchanging one crypto for another, or spending crypto (buy transactions don’t need to be reported until one of these 3 occur) The IRS has also issued guidance on how to treat cryptocurrencies for tax purposes. According to the IRS, “virtual currency is treated as property for U.S. federal tax purposes.” Any gains or losses from buying, selling, or using cryptocurrencies will be subject to capital gains taxes. This is important when you sign up or stake your cryptocurrency for gains via an exchange, digital wallet, or lending service. It is best to research and follow the IRS guidelines on approaching digital currencies because it could save you from an audit, fine, or, worse, jail time.
With the rapidly changing landscape of the crypto market, it can be difficult to stay up-to-date on all the latest news and changes — especially when it comes to taxes. Here are a few tips on staying aware of tax implications. Follow tax sources like the IRS website, stay up-to-date on IRS guidance by subscribing to their email list, and speak with a tax professional familiar with cryptocurrency regulation.
How Crypto Taxation Really Works
Individuals cannot take casualty losses since the Tax Cuts and Jobs Act of 2017. Tax time can be stressful, especially when you’ve lost crypto in the recent bear market. If you are a corporation, you can take a loss. Black Bitcoin Billionaire moderator and certified CPA Charles J. Kelly (aka “CJ the Smart Guy”) states, “In 2017, a lot of rules were changed, taxpayers were no longer able to do like-kind exchanges for any property besides real estate.” The IRS changed the way they looked at cryptocurrencies from worthless to property, and now every time you sell it, spend it, and exchange it for another crypto, you have to report a capital gains loss. This is why it is best to remove your coins from exchanges into cold storage, so you don’t incur a loss if the exchange is hacked or goes insolvent.
While cryptocurrency brokers aren’t required to issue 1099 forms to clients yet, taxpayers hold the responsibility to accurately report their tax situation or could face penalties or criminal charges. Whenever a new asset class or form of currency emerges, there will always be questions about taxation. With bitcoin becoming more and more popular all over the world, those questions are only going to increase. However, as we’ve seen above, the answer to how cryptocurrency is taxed isn’t nearly as complicated as some might think once you get once you get a knowledgeable certified tax professional on the job, such as a CPA (Certified Public Accountant) or EA (enrolled agent).
As the rise of digital currencies becomes more and more prevalent, investors must stay informed on their tax implications. The taxation regulations for cryptocurrencies are always evolving — so you must seek a financial expert to help guide your investment decisions. Black Bitcoin Billionaire content exists solely for educational purposes this is not financial advice and is not tied to any specific institution — making it instrumental in educating yourself about crypto-taxes before investing!