How Do Cryptocurrency Gains Impact Tax Law?

How Do Cryptocurrency Gains Impact Tax Law?


Have you invested in cryptocurrency this past year? If so, it’s essential that you have an understanding of how the Internal Revenue Service (IRS) is going to tax the gains on that investment. As of November 2021, the global value of cryptocurrency has surpassed $3 Trillion. If you have any type of investment in cryptocurrency, it’s time to prepare for tax season so you are not surprised at how much you owe the government for crypto capital gains tax. When you have questions, our crypto currency tax lawyer has all the answers you need. Below we will provide a crypto tax summary which includes important information for your 2022 tax filing.

What are the forms of cryptocurrency?

Anyone who wishes can purchase cryptocurrency from one of the many options available on the market today. In what was originally started as a joke, Dogecoin grew 10,000 percent in 2021 alone. Some examples of popular cryptocurrency options available include:

  • Ethereum
  • Binance coin
  • Cardano
  • Tether
  • XRP
  • Bitcoin

How the IRS views cryptocurrency

When it comes to the IRS and cryptocurrency, the agency views it more as property and less as currency. For this reason alone, those who own cryptocurrency in the United States must follow the rules put in place for capital gains instead of ordinary income. Generally, you will be required to report your capital gains and losses on crypto this filing season.

Do you have to pay tax on crypto gains?

If you sold any cryptocurrency in 2021, you will be subject to either short-term or long-term capital tax on crypto gains. Thisall depends on how long you held the crypto in your possession prior to making the sale.

Short-term capital gains tax on crypto is taxed using the income tax rate of no more than 37 percent as the crypto tax rate. The highest rate taxed for long-term capital gains is 23.8 percent, which is broken down to 20 percent plus the 3.8 percent net investment income tax, which is a good answer for the question how much tax do you pay on crypto gains?

The IRS provided the following filing rates for 2022:

SingleUp to $41,675$41,676 to to $459,750Over $459,750
Head of householdUp to $55,800$55,801 to $488,500Over $488,500
Married filing jointlyUp to $83,350$83,351 to $517,200Over $517,200
Married filing separatelyUp to $41,675$41,676 to $258,600Over $258,600

What are forks?

Not all transactions involving cryptocurrency will be taxable, according to the IRS. It all depends on whether or not the transaction was a hard or soft fork. A soft fork rarely results in any income being made from the transaction, which means the person who sold the cryptocurrency is in the same position as they were prior to making the sale.

A hard fork happens when a new type of cryptocurrency is created and goes through a developmental period along with the original version of the cryptocurrency. Hard forks can wind up being tax-neutral or taxable. It all depends on whether or not the person holding the cryptocurrency receives new units or there as an involuntary conversion as part of the transaction.

A third taxable option for cryptocurrency is what’s known as an airdrop. This occurs when units of crypto are given to people for free, often as part of a marketing campaign. The IRS views airdrops as windfall gains, which means they can be taxed under capital gains rules. The only way a taxpayer can avoid paying taxes on an airdrop is if they are unable to avoid receiving the crypto units.

What are NFTs?

NFTs, or non-fungible tokens, are comparable to a digital deed to a piece of property. NFTs that have been sold include the following:

  • Audio files
  • Artworks
  • Video clips
  • Memes
  • Tweets
  • Manuscripts

NFTs are not regulated heavily by the IRS, but they are taxed using capital gains. The person who creates an NFT is required to pay tax using Schedule C. If a business creates an NFT, it must pay income tax using Form 1120, 1120S, or 1065. Investors of NFTs would report their IRS crypto tax using Form 8949 and Schedule D. There are some rare occurrences where the NFT can be considered a collectible and cannot be taxed.

Guidance from the IRS

The IRS amended its Form 1040 in 2020, adding the following language to it with a checkbox, asking the taxpayer to report if they:

“received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency.”

The addition of this checkbox makes it nearly impossible for taxpayers to deny that they did not know they had to report cryptocurrency gains. Crypto tax reporting is now required of every taxpayer in the United States because of that simple checkbox on Form 1040. There has yet to be a separate crypto tax form created by the IRS.

Since this tax reporting season is the first where all taxpayers will be asked about trading in cryptocurrency, things might get a little confusing. Below, you will find a guide from the IRS that explains when you should check the “yes” box on Form 1040:

  • You received cryptocurrency as payment for any services or goods you provided
  • Virtual currency was received or transferred for free and does not fall under the federal tax rules as a gift
  • You received new virtual currency from staking and mining activities
  • You received new cryptocurrency due to a hard fork
  • You received cryptocurrency in an exchange for goods, services, or property
  • You traded one cryptocurrency for another form of cryptocurrency
  • You sold cryptocurrency
  • Any other disposition of financial interests in cryptocurrency

I received IRS Letter 6174, what does this mean?

If you recently received a letter from the IRS titled Reporting Virtual Currency Transaction letter 6174, it means that the agency has been informed you bought or sold cryptocurrency. The agency usually receives this information directly from Coinbase, Bitcoin, or any other currency exchange. In this letter, the IRS is requesting that you amend your tax filing to report the loss or gains from trading cryptocurrency. If you fail to do so, you could face criminal enforcement or civil penalties.

The Voluntary Disclosure Program

The IRS operates a voluntary disclosure program that helps taxpayers who have committed prior tax crimes return to compliance with the agency. Taxpayers who enter this program can return to compliance without facing criminal penalties.

In order to make this happen, you must report the fraudulent actions and correct your returns prior to the agency opening an audit of your returns. For the most part, as long as the taxpayer reports their criminal actions and corrects their returns prior to an audit, they will be able to avoid criminal and civil penalties.

It is essential that you work with an experienced crypto currency tax advice attorney when reporting tax crimes. Our team will assist you with filing the voluntary disclosure required to correct your returns. If you attempt this on your own you run the risk of taking part in the unauthorized practice of the law, which is also a crime.

Track all of your virtual activities

It is in your best interest and responsibility to track all of your virtual activities in relation to trading, buying, or selling cryptocurrency. Much like you keep track of all your other banking transactions, you should do the same when using cryptocurrency. Even if you think a certain transaction won’t be taxable, it’s important to keep note of when you sold it, how long you held it prior to selling it, who you sold it to, and how much you made on the sale. All of this information might be requested by the IRS in an audit, making it easier to access when the time comes.

How Can a Crypto Tax Attorney Help You?

Have you traded cryptocurrency this past year? If so, you are required to report the gains or losses from the transactions if they fit into the specifications previously mentioned. The experienced team at Abajian Law can answer all of your questions and guide you through the most challenging crypto currency tax issues. Even though there are no crypto tax laws on the books yet, the IRS has asked Congress to create legislation so the agency can close the tax gap with this unique property.

Our team of tax lawyers can assist with any of the following:

  • Identify your gains, losses, and income from trading cryptocurrency
  • Prepare cryptocurrency tax reports
  • Respond to any and all letters or notices sent by the IRS
  • Fight tax bills sent to you for unreported cryptocurrency
  • Create a tax return for your cryptocurrency trading
  • Amend a previous year’s tax return to reflect cryptocurrency trading

When you have questions, the tax attorneys at Abajian Law have answers. Contact our office at 818-791-1004 to schedule a consultation with a member of our team. You can also complete a contact form on our website and someone will reach out to you as soon as possible. Don’t let your foray into the world of cryptocurrency lead to an audit or civil or criminal penalties when Abajian Law can help you file the correct return.

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