Have you been dabbling in digital currencies lately? If yes, bitcoin buyer will have to pay tax on your digital assets. The Internal Revenue Service demands it. It has even set a time limit for the filing of tax returns. The deadline is April 18, 2022. Late submissions will have to pay fines.
Reasons for the Taxation
The U.S. authorities consider digital assets properties, even if they belong to the virtual world. The IRS had reached this decision several years back. Hence, even if you are a beginner, you become eligible for the capital gains tax.
In case, your digital assets come into play for other activities, then you become eligible for income tax. The authorities view NFTs and cryptocurrencies as your sources of income. It does not matter if your activities are related to centralized/decentralized finance.
Paying Capital Gains Tax
Here, the complete funds connected with disposed digital assets do not come into play. The taxation refers to the capital profits that you make through your online actions.
What are these actions?
They include –
- Gifting someone digital currencies worth over $15,000
- Exchanging or trading of digital asset. You may give one type, and take another type in return. An example is using your cryptos to purchase NFTs.
- Selling your cryptos in exchange for fiat currencies. Examples are Japanese yen, U.S. dollar, etc.
- Using your cryptos for purchasing small/big services/goods. Examples are buying foodstuffs, a cup of coffee, video games, etc.
The authorities note the difference between purchase price and selling price for every action. The difference is your capital gains tax.
They also note something else.
- How long have you been in possession of your crypto assets, before disposing of them?
- To which category of income tax do you belong?
Therefore, capital gains fall into two slots.
- Long-term – Your crypto assets have been with you for over a year. Based upon whether you certify for combined marital or individual income, the IRS offers a tax rate of 0%, 15% or 20%, on your capital gains.
- Short-term – Maybe, you have not even held your crypto assets for a year. Therefore, your income tax bracket becomes the rate of your capital gains taxation.
Suppose, you have confronted losses in your trading deals. You may utilize them to offset your capital gains. The condition is that the losses must stretch across your entire load of assets in a specific category.
Similarly, you may offset your normal income tax to the tune of $3,000. It depends upon how long you have been in possession of your crypto assets. If the losses are more than this amount, you may carry them forward.
Paying Income Tax
How do you qualify for income taxation?
- You must have earned interest in cryptos via DeFi lending.
- Your crypto gains may have come from interest-bearing accounts and liquidity pools.
- Maybe, an airdrop supplied you with digital currencies.
- You may have received payment in the form of digital currencies, for performing some tasks. They could even include bug bounties.
- Crypto mining provides an income from transaction charges and block rewards.
It is interesting to note that there is no clarity regarding taxation for minting of tokens.
Staking can help you earn cryptos. However, the IRS is once again unclear about classifying it as a mining income.
Thus, taxation laws bring certain doubts to your mind, Therefore, it would be best to approach a professional to guide you in the matters of crypto taxation.
At the outset, note down all the digital currency activities that you have undertaken throughout the year, 2021.
If you have only indulged in a couple of trading deals, it should be easy. However, if your experience has led you to experiment with deals concerning airdrops, NFTs, yield farming, etc., you are bound to have a long list in hand. Therefore, the next time, do record every activity as you go along!
Next, you must have the calculations of your capital gains and losses, ready. Use suitable software programs, or a professional, for assistance.
Now, fill out the requisite forms. There are separate ones for income, self-employed earnings, etc.
Submit the completed forms and the amounts for each, to the appropriate authorities. Do it prior to the deadline.