February 13, 2023

Invested in Cryptocurrency? Here’s How To Prepare For Tax Season

As tax time rolls around, it is important to understand how to report your crypto assets.

Cryptocurrency has been all over the news, from its up-and-down swings in value to its promise for the future. Digital currencies like Bitcoin and Ether aren’t connected to governments or banks, instead operating on their own networks. As tax time rolls around, it is important to understand how to report your crypto assets. While Plimoth Investment Advisors has not recommended that our clients invest in cryptocurrencies, if you have purchased or sold any this year – here’s what you need to know about your taxes:

Currency or Property?

The federal government doesn’t consider cryptocurrency to be liquid money. Instead, it values crypto much more like property — in the same way it would a piece of real estate or stocks. Those assets fluctuate in dollar value over time, and you’re only taxed when that value is realized by a sale. Therefore, if you sell property for more than you paid for it, the government taxes your capital gain (either at a short-term or long-term rate, depending on whether you’ve held it for more than a year). The amount of the tax also varies depending upon your income level.

If you used dollars to buy crypto and you got dollars back when you sold it, you’re taxed on the difference in dollars (the amount you received when you sold your cryptocurrency less the amount you paid to buy it). At the same time, that means you can also report a loss in value, and then use that loss to offset other capital gains elsewhere. You can deduct up to $3,000 of your crypto losses from taxable income.

Other taxable events include exchanging your crypto for goods and services or exchanging it for other cryptocurrencies. When you exchange your crypto for something of value, the IRS considers it a taxable event.

Keeping Track of your Transactions

One of the most important things you can do to prepare yourself for paying taxes on your crypto is to keep good records of each transaction. Know exactly what you paid for the asset, and know the exact market value of the asset when you sold it. Since virtual currencies are so volatile, it’s important to keep an accurate tally of the difference in value. If you keep good records throughout the year, it will be easier to compile that data later.

Reporting your Cryptocurrency Related Transactions

Cryptocurrencies are not exempt from government regulation. The IRS has started tracking transactions involving virtual currencies to combat money laundering and other illegal activities. If you fail to disclose your cryptocurrency-related transactions on your annual tax return, the IRS could penalize you for evading taxes.

Like all tax-related questions, it’s a good idea to check with your accountant or tax preparer about reporting capital gains and losses. A qualified professional can help you identify what’s required under IRS regulations—and ensure the accuracy of your filing.

Plimoth Investment Advisors does not use cryptocurrencies in our investment discipline, but we’re happy to provide you with any information we have and help you with other financial questions or planning needs. The experts at Plimoth Investment Advisors can help you plan and invest for a successful financial future. Contact us today to get started.

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