The basics of taxes on crypto

As of this writing in fall 2021, there were only a few laws regarding crypto and taxes. If you made a profit buying and selling cryptocurrency, you had to report it. It was always a matter of time before the U.S. Congress and the IRS would get around to passing a law so they would know exactly how much you made. That day has finally come.

Congress passed an infrastructure bill that included reporting of crypto transactions by cryptocurrency exchanges. We are going to let you know what the law is, and what to expect.

Cryptocurrency exchanges are brokers

First, what’s a cryptocurrency exchange crypto? It’s a marketplace or platform to buy or sell cryptocurrency. You can use crypto exchanges to swap one cryptocurrency for another, or to buy and sell cryptocurrencies with U.S. dollars. Popular cryptocurrency exchanges include Coinbase, Gemini, or Binance.

Per the new bill, cryptocurrency exchanges are now considered “brokers,” a firm that is a middleman between an individual investor and a public security exchange. Brokers help people buy and sell stocks on public exchanges, such as the New York Stock Exchange, through their apps and platforms. Examples of brokers are Fidelity, Vanguard, and Robinhood. Cryptocurrency exchanges are now brokers.

Crypto broker reporting requirements

Cryptocurrency exchanges will now have to provide tax information to you, your silent partner, and the IRS. That means you should expect crypto exchanges to start sending you tax statements that report how much you made buying, selling, and exchanging cryptocurrency.

$10,000 FinCEN for crypto

Also included in the bill was the requirement that any transfers of $10,000 in cryptocurrencies need to be reported on a Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, by your cryptocurrency exchange. This is not a new law. This is actually an old law that banks have been dealing with since the 1970s, under FinCEN, or the Financial Crimes Enforcement Network. Now, both cryptocurrency exchanges and banks have to report these transactions.

What does this mean for you? It means that every time you transfer $10,000 on a cryptocurrency exchange, the government will know.

When do the changes take place?

The new reporting requirements don’t start until the year 2023, which means cryptocurrency exchanges are not required to send you tax statements (1099-B from brokers) until February 2024.

But don’t get too excited. Many of these cryptocurrency exchanges will probably start sending you tax forms earlier to show the government that they are following the rules. In fact, many of my clients received 1099-Bs from Robinhood in 2020 for their crypto trades even though the law wasn’t in place yet.

Digital assets are now like stocks, bonds, and other equities

Written into the new law is that “digital assets”—Bitcoin, Ethereum, and NTFs—are now to be treated as securities in terms of short- and long-term capital gains. This means that rules regarding stocks and bonds will also apply to the trading of cryptocurrencies. These rules include wash-sale rules and sales on collectibles. Don’t worry, we will go over these below.

What is the capital gains tax?

The capital gains tax is a tax you pay on the sale of assets. If you make profit on selling real estate, stocks, or art, you pay capital gains tax. Most people want long-term capital gains (assets you sell after holding it for at least one year), since you pay a lower tax rate.

What is the wash-sale rule? Will it affect crypto?

For those who don’t know, the wash-sale rule says that if you sell a stock at a loss, you will not be able to take a tax deduction if you re-purchase a similar stock within 30 days before or after you sold your stock.

Here is an example:

You buy 100 shares of Apple stock for $2,000. Some time after, the value of your stock drops to $1,200, so you freak out and sell it at an $800 loss. A week later, you change your mind and decide to repurchase the Apple shares. Because you repurchased the same stock in under 30 days (in this case one week), you are not allowed to take deduction on your tax loss of $800. However, had you waited 30 days to repurchase your Apple shares, you could have taken the deduction. You will still be able to deduct the $800 loss, but only after you’ve sold the repurchased shares.

The bill didn’t address wash-sales directly. For 2021, the wash sale rule doesn’t apply. But don’t be surprised if Congress changes the rules regarding cryptocurrency transactions are wash-sale rules in the coming months.

What is tax treatment on NFTs?

What’s an NFT or non-fungible token? It’s a unique “data set” (computer code) that can be used to easily track digital items such as photos, video, audio, and digital art, and verify the ownership of the items. Think of it as owning an original Picasso or Da Vinci, but it’s digital. Trading of NFTs has become popular on NFT marketplaces such as OpenSea or SuperRare.

Long-term capital gains is 28% on collectibles

Normally the tax treatment on the sale of assets that are held over one year would be considered long-term capital gains between 15% and 23.8%.

But there’s a special tax rate for collectibles such as art, classic cars, and precious metals at 28%. That’s right;  if you hold a collectible over one year and sell it at a profit, the IRS wants 28% (not 15%-23.8%).

Are NFTs going to be considered collectibles to the IRS? Once again, there were no mention in the bill, but I wouldn’t be surprised if the IRS issues a statement that they will be subject to the 28% collectibles tax in the coming years.

Editor’s note: This article was originally published on TaxedRight.com.