In the event that you put money into cryptocurrency last year, you may be in for an unpleasant surprise when filing your taxes this year. Cryptocurrencies like Bitcoin, Ethereum, and others are taxed.
The Internal Revenue Service classifies cryptocurrency holdings as “property” for tax purposes, meaning that virtual money is subject to the same crypto exchange tax as stocks, gold, and other assets.
Many first-time crypto investors entered the market in 2021. Depending on where in the year you invested, you may have made or lost a lot of money due to the crypto market’s volatility.
Accounting for cryptocurrency purchases and sales via online exchanges is straightforward for the vast majority of users. However, the more you engage with digital money, the more difficult things might get.
When Should Cryptocurrency Transactions Be Reported on Your Taxes?
Investing in Cryptocurrency Using Dollars
You will not incur any tax liability if you acquire virtual currency using U.S. dollars and retain it at the exchange where you made the transaction or move it to your own wallet within the tax year. If all you did with cryptocurrency this year was buy some with dollars, you don’t have to tell the IRS about it.
Dealing with Virtual Currency
When cryptocurrency is used as a medium of exchange, it becomes subject to taxation. Trading one cryptocurrency for another, like purchasing Ethereum with Bitcoin, or making purchases using cryptocurrency are all examples of this. This year, the IRS is tightening down on cryptocurrency transactions in an effort to prevent tax evasion.
Exchange or Production of NFTs
Whether it’s a digital sports collectible or an animated flying cat with a Pop-Tart body, if you’re the sole owner of that particular digital thing, then you’ve got yourself a non-fungible token (NFT), which is produced on a blockchain.
Another taxable event occurs when an NFT is sold for cryptocurrency or exchanged for another NFT. If you make (or lose) money from the sale of the NFT you developed, that sum must be reported and taxed as income. If you make money from an NFT you developed, that money will be considered royalties and subject to crypto exchange tax.
The tax treatment of NFT trading is similar to that of crypto trading. As with other cryptocurrencies, capital gains taxes apply to NFTs based on works of art since they are considered collectables.
Taxes on capital gains are due if an NFT is bought or sold using a cryptocurrency. The amount you owe will be determined by how long you owned the NFT and whether or not you earned a profit. Losses on NFTs may be deducted from taxable income. When purchasing an NFT, you may claim a loss if the value of your Ethereum has decreased since you first purchased the NFT.
When using the Binocs platform, users will be able to integrate their preferred cryptocurrency exchange into the system in order to calculate the taxes that pertain to their cryptocurrency holdings.