In recent years, cryptocurrencies have been one of the hottest investments around. And as is usually the case with risk-on assets, they have also had a tendency to generate big gains or big losses for those who invest in them.
Large movements in price on a short period of time are bound to catch tax authorities' attention. In fact, in the United States, the IRS has already stated that it will treat cryptocurrencies as a form of property for tax purposes. This means they are subject to capital gains or loss treatment when used as an investment and taxed accordingly.
The IRS's perspective on crypto
Now, despite the fact that there were some earlier indications that the IRS would be less harsh on cryptocurrencies than they originally expected, their new guidance on taxing cryptocurrencies is even more strict than originally planned.
If you are a US citizen, then it's important to report your cryptocurrency gains to the IRS - but how? Well, here are some things you need to know about what you have to report and how much your cryptocurrency investments could come back to haunt you.
So report now or regret later.
When it comes to popular cryptocurrencies are the tax reporting guidelines any different? Bitcoin, Dogecoin, Ethereum, is paying taxes on these cryptocurrencies all the same?
How paying taxes on Bitcoin, Ethereum, and Dogecoin works
The answer is yes and no.
Bitcoin (BTC) and other cryptocurrencies like Ethereum (ETH) are reportable, but there are different rules for each cryptocurrency. The rules for reporting taxes on Bitcoin (BTC) aren't notably different than the ones for Dogecoin (DOGE).
The report you submit to the IRS will be broken down by type of transaction, so you should report each type of transaction separately.
If you have a taxable event with a coin, report it. If you bought any coins or got them as income, report it. If you swapped one cryptocurrency for another, report the transaction.
Transactions must be reported to the IRS on form 8949 and gains/losses from those are taxed at normal capital gains rates. Similarly, if you have significant losses from cryptocurrencies, report it and the loss could offset gains.
Coinbase is one of the most popular ways to buy and sell cryptocurrencies like Bitcoin (BTC) . There are thousands of others around the world, though, but many report similar issues when filing with the IRS about accurately reporting the tax owed on cryptocurrencies. Many users of cryptocurrencies use many ledgers, wallets, exchanges and more, complicating the tax reporting process even further. When you swap and exchange cryptocurrency through all of these different tools, you can incur a number of different taxable events on the same cryptocurrency holdings.
Taxes on NFTs
But what if you have bought an NFT? How is that taxed? NFTs are unique to traditional cryptocurrency because while they can be traded and sold, they cannot be mined while cryptocurrencies like Bitcoin and Ethereum can. NFTs are created by a company and assigned to individuals for them to keep or sell on secondary markets. While some report them as property because of how much they can be worth, others report them as securities because of their financial nature.
Because of all of the complexities that surround cryptocurrencies, it's best to utilize a crypto tax software when you arrive at tax season. The software automatically does the hard work and reports your profits and losses while also doing the necessary calculations.
When you mix NFTs, wallets, ledgers, exchanges, different cryptocurrencies like Ethereum, Dogecoin, and others all together, you get a complex tax situation come tax season. Cryptocurrency taxes aren't as straightforward and simple as some may think. A report even showed that out of all the crypto investors in the US, a small percentage of them reports their taxes each year--meaning they almost never report it at all. This is going to change as the IRS cracks down on crypto users, even enacting rules that require reporting on past cryptocurrency transactions that weren't reported.
Crypto tax software
If you're a tax professional or just filing your taxes yourself, one of the best software solutions for crypto taxes is Ledgible. The Ledgible Platform was built specifically for cryptocurrency users and professional CPAs to report crypto taxes.
With Ledgible, you can report all of your purchases on every cryptocurrency wallet you have, including Bitcoin, Dogecoin, Ethereum, etc. If you want to learn more about Ledgible and get started for free, click here.