How To Keep Track Of Crypto For Tax Purposes In 2022

Cryptocurrency is becoming increasingly popular as Bitcoin, Ethereum, and other coins like Dogecoin and Shiba Inu cash continue to rise in value. For many individuals across the country, cryptocurrency has become a unique investment. Investors can buy and sell cryptocurrency anytime and watch their money grow over a year.

How does cryptocurrency work?

It moves around without a central bank or government controlling it. Unlike traditional currencies, cryptocurrencies are made using cryptography, making them safe for people to buy, sell, and trade. Cryptocurrencies can purchase goods and services but are usually used as investments.

Cryptocurrency is also essential in some decentralized financial networks, where digital tokens are used to make transactions. Bitcoin is the most well-known digital currency. It reached an all-time high of more than $65,000 in 2021 before going down.

Is Income from cryptocurrencies taxable?

The IRS sees cryptocurrencies or digital currencies as property. According to the IRS Publication 544, Sales and Other Dispositions of Assets, the same tax rules apply to cryptocurrencies as they do to the property. This means that any transactions involving cryptocurrencies must follow the same rules. In simple terms, you have to report taxable events that happen to your cryptocurrency investments on your taxes.

How are US crypto taxes calculated?

Since cryptocurrencies are considered property by the IRS, they may be subject to either Income Tax or Capital Gains Tax. Most of the time, the type of exchanges you make with your cryptocurrency will determine how much tax you have to pay.

● Income Tax: If you get paid in cryptocurrency, you must pay income tax on that cryptocurrency.

● Capital Gains Tax: If you trade, sell, or spend your cryptocurrency, you must pay capital gains tax.

Gains on cryptocurrency taxed.

You may have to pay taxes on capital gains depending on the asset you gain. Most of the period, there were two types:

● Short-term Capital Gains

● Long-term Capital Gains

These depend on how long you own the asset (cryptocurrency).

You have a short-term capital gain when you buy a cryptocurrency and sell it for more than you paid for it within a year. These are taxed at the same rate as the taxpayer's regular wage income.

This is called a long-term capital gain when you hold on to an investment for more than a year and then sell it for more than you paid. Long-term capital gains tax rates, which can be as low as 0%, are used to tax these gains. To figure out how much you made or lost on each crypto transaction, you need to use the following formula:

Fair Market Value - Cost Basis = Capital Gain or Loss

You can also use a crypto capital gains taxes calculator like FlyFin to determine how much crypto tax you owe.

How to avoid paying tax on cryptocurrency capital gains?

As an asset, crypto is taxed, so it is hard to avoid paying taxes. But there are ways to keep from having to pay taxes on your cryptocurrency:

● You can use your IRA, 401(k), or another retirement plan to buy cryptocurrency.

● Declare your encryption methods as Income and pay taxes on them at the same rates as your other Income.

● Donate your cryptocurrency to a qualified charity and get a tax break.

● Move to Puerto Rico, where all capital gains are tax-free.

How Much Do Crypto Capital Gains Taxes Cost?

The federal tax rate on cryptocurrency is the same as the rate on capital gains. For the year 2022, the rate for short-term capital gains is between 10 and 37%, and the rate for long-term capital gains is between 0 and 20%. The IRS determines your crypto-asset increases based on your Income and how long you've held on to them. The holding period for a cryptocurrency starts the day after you buy it and lasts until you trade, sell, or deposit it elsewhere.

How to figure out crypto taxes?

Getting your crypto taxes done takes a lot of time. You can do it by hand or save hours using a crypto tax calculator like FlyFin. If you want to figure out your crypto taxes, here's what you need to do:

● Figure out all of your taxable symmetric encryption transactions for the whole financial year you are reporting on.

● Find out which transactions are taxed by Income Tax and Capital Gains Tax.

● Use the accounting method you chose to determine each transaction's cost base.

● Calculate your profits, make gains and losses, revenue, and expenses.

● Then, you'll need to tell the IRS about all taxable crypto sales, the money you got from the sale, and any capital gain or loss resulting. You'll also need to tell the IRS about any crypto income.

● To include your crypto taxes in your annual tax return, you must fill out Form 1040, Schedule D, and Form 8949 to report your crypto sales, capital gains, and losses. You must also complete Form 1040, Schedule 1, or Form 1040, Schedule C, to report crypto income.

Conclusion

Taxes are hard to figure out, and crypto tax is no different. As the industry changes, so does the IRS's tax code regarding cryptocurrencies. But the IRS considers it tax fraud if you don't report your bitcoin gains, losses, and Income on your taxes or forget to do so.

It can lead to a fine of up to $250,000, criminal charges, and up to five years in prison. The IRS has said that they have sent messages to crypto investors they think are not paying enough or trying to avoid paying tax. So, if you earn, trade, or sell cryptocurrency, you should include it on your tax return.

If you think filing crypto taxes is too hard, you can hire a CPA or use FlyFin's Crypto Tax Calculator. It is powered by AI and helps you figure out how much cryptocurrency tax you have to pay and how to lower it. Also, this cryptocurrency tax calculator is supported by CPAs who can help you figure out your cryptocurrency taxes.

#Disclaimer Note : This publication is not intended for use as a source of any financial , money making legal, medical or accounting advice. The information contained in this guide may be subject to laws in the United States and other jurisdictions. We suggest carefully reading the necessary terms of the services/products used before applying it to any activity which is, or may be, regulated. We do not assume any responsibility for what you choose to do with this information. This article is not meant for financial advice , Use with your own judgment.