Written by Tor Constantino for Inc. (TNS)
In recent months, the IRS has been making strides in their understanding and enforcement of cryptocurrency and related tax laws. As a reminder, the tax agency has also reiterated that income from digital transactions must be reported this year.
Founders and entrepreneurs who own cryptocurrencies should discuss the following tax topics with their accountants or tax advisors to avoid any issues with the IRS in the future.
How does the IRS classify cryptocurrency?
According to the IRS website, cryptocurrency is treated as property and is subject to capital gains taxes. The length of time an asset is held before being sold greatly affects the tax rate, with short-term gains being taxed at a higher rate than long-term gains.
What constitutes a taxable event in the world of cryptocurrency?
Taxable events in the crypto world go beyond converting digital currencies back to cash. Swapping one cryptocurrency for another, including stablecoins, can trigger a taxable event. The amount of tax owed depends on the initial cost basis of the asset being sold. Surprisingly, buying digital tokens and transferring them between exchanges or wallets is not considered a taxable event. However, selling tokens at a profit or loss, receiving digital assets in exchange for goods or services, or earning crypto interest are all taxable situations.
Are there any tax benefits for cryptocurrency holders?
For savvy investors, the volatility of cryptocurrencies can present opportunities for tax minimization through loss harvesting. This involves trading a cryptocurrency that has decreased in value for another type of cryptocurrency or stablecoin. The original asset can be repurchased immediately without any waiting period, unlike traditional securities. This strategy allows for the intentional capture of losses, thereby reducing overall tax liability.
Additionally, this year’s tax code allows for a $3,000 loss to be deducted from other income from a business. If there are more losses in 2024, the IRS allows them to be carried over into future years until they are fully offset.
Is it complicated to track and report cryptocurrency to the IRS?
Tracking and reporting cryptocurrency transactions for tax purposes has become easier with the availability of dedicated tax tracking software that can connect directly to a crypto exchange account. These tools can automate the process, ensuring accuracy and compliance with tax regulations, even for transactions that occurred years ago. Some of the most highly rated solutions by users include TurboTax Crypto, CoinTracker, and Koinly.
“There’s no denying it, crypto tax is complex. Every single transaction needs to be recorded, values must be understood in US dollars, and short- and long-term periods must be taken into account. It’s a high-level task,” said Michelle Legge, head of crypto tax education at Koinly.
For specific questions about cryptocurrency, it’s best to seek advice from tax professionals with experience in digital assets. Legge recommends year-round attention and planning to effectively manage taxes, especially with the complexities of cryptocurrency investments. Planning for the next tax season should begin shortly after filing for the current year.
By staying informed and proactive, investors and entrepreneurs can take advantage of the opportunities provided by digital currencies while remaining compliant with tax laws.
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