Crypto was, at one point, seen as something of an outlier, only really used by certain groups. As acceptance and usage have grown (have you seen the convenience store crypto ATMs) the government has seen the tax potential it holds.
Unfortunately not every crypto holder has understood their tax obligation.
Whether you are experienced with crypto or are just opening a wallet, it’s important to begin to do some detailed crypto tax planning early.
What’s Considered “Crypto?”
For taxation purposes, the IRS classifies cryptocurrency as a digital asset. Stablecoins and NFTs (Non-fungible Tokens) are also part of that category.
This categorization is important because it means that those assets will be treated as property and will be subject to the same tax rules and regulations.
Do You Know What You Have?
The somewhat ethereal nature of cryptocurrency makes the details at times “difficult” to wrap your arms around. Crypto holders find it easy to buy and sell but accurate record keeping can be hard to maintain and manage.
This can be a problem not just from a pure financial standpoint, but when it comes time to do your business tax planning.
If you don’t know:
- Exactly what you hold
- Where your crypto sits
- What transfers you’ve made
- How purchases and sales are categorized
when it comes time to prepare your taxes, you may end up making income estimates that are inaccurate and can negatively impact your tax liability.
So how do you avoid this?
What You Need To Do For Crypto Tax Planning
Because of the newness and nuances of digital assets it can be a good idea to enlist a professional for crypto tax help. They can work with you to develop a tax plan that is compatible with your crypto holdings. And the better prepared you are, the more advantageous that tax plan can be.
Timing is important
Money made on selling cryptocurrency can be subject to income and capital gains taxes. Keep in mind that the tax rate for short-term gains is higher than that for long-term gains. So, holding a crypto investment for 365 days+1 can lessen some of your tax liability.
Diligent record keeping
It’s important that you keep good records not just about what you have but also details like:
- Purchases (including transaction date and time)
- Mined, staked, or gifted crypto
- Sales
- Fees paid
- Exchanges
- Market value
- Asset location
All of this detail can be used by an experienced crypto CPA in developing a tax plan.
Manage transfers vs taxable events
Not every action you take with a digital asset will be taxable. You can transfer crypto from one wallet to another, give someone crypto as a gift (under $19,000 in value), and purchase crypto without adding to your tax total.
Know when to take crypto
If you are a business owner, you may have decided to accept crypto as payment for your products and services. It’s a perfectly legal (and progressive) decision but it’s also one that may have tax implications. Not only will you have to pay sales tax on the initial transaction but you may also be responsible for capital gains taxes and standard income tax payments when you eventually sell that crypto payment.
Get Help With Your Crypto Tax Planning
Crypto and other digital assets provide you with an opportunity for a strong return on your initial investment. And if you are proactive in your recordkeeping and management you will have a better opportunity for protecting that investment come tax time.
Working with an experienced and focused crypto CPA can help with your crypto tax planning. They will work with you to develop a tax strategy that stands all year long.
If you are a crypto holder, or considering jumping into digital assets, schedule a free consultation today.