The cryptocurrency market has had a record year, surpassing $3 trillion in value in November. Bitcoin and ether, two of the most popular cryptocurrencies, also reached all-time highs.
This widespread adoption prompted lawmakers to place a greater emphasis on cryptocurrency regulation. They debated frameworks for investor protections, taxes, and more throughout the year. As a result, additional regulation is almost certain.
Preparing for tax season is the first step for anyone who traded cryptocurrency or other digital assets last year.
Cryptocurrency: Get Organize
Taxable transactions involving bitcoin, ether, dogecoin, and other digital coins must be reported to the IRS by 2021.
If this is the case for you, begin by calculating your profits and losses. Even if you have multiple wallets and exchanges, you are responsible for sorting everything out on your own. According to the Internal Revenue Service’s website, investors must maintain records “sufficient to establish the positions taken on tax returns.”
Setting a high priority on proper record keeping is critical. Depending on your situation, you should keep your cryptocurrency transaction history for at least three years. Shehan Chandrasekera, CPA, tax strategist at cryptocurrency portfolio tracker and tax calculator CoinTracker.
Additionally, you may wish to use a reputable cryptocurrency and portfolio management software tool that keeps track of transactions, calculates gains and losses, and stores proof in the future.
This enables investors to “accurately build their tax profile and demonstrate their actual tax liability to the IRS,” Chandrasekera previously told CNBC Make It.
Additionally, working with a CPA may be beneficial in guiding you through the reporting process and assisting you in planning for the future, especially with the growing possibility of additional cryptocurrency regulation.
Be Aware of Upcoming Regulation
Over the last year, there has been an increased emphasis on cryptocurrency regulation. Unable to predict the outcome, it is prudent to keep up with legislative debate.
Policymakers propose in the Build Back Better Act to impose “wash sale” rules on commodities, currencies, and digital assets in 2022. If passed, this would prohibit cryptocurrency investors from repurchasing the same asset immediately after selling it at a loss.
Additionally, the bipartisan infrastructure bill signed into law in November includes tax reporting provisions for digital assets such as crypton and nonfungible tokens, or NFTs, requiring crypto brokers to report cryptocurrency gains on a form similar to a 1099.
However, the provisions will not take effect until January 2024, and in the interim, cryptocurrency industry lobbyists intend to push for amendments and standalone bills to modify them.