Sunday, May 26, 2024

2021 Tax Deadline: Don’t Forget to Report Your Crypto Transactions to the IRS

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With the 2023 tax regulations coming into play which will require crypto transactions over $10,000 to be reported, consumers still need to report the sales and acquisitions of their 2021 crypto investments to the IRS.

Last year, President Joe Biden introduced a new tax infrastructure bill that will require consumers to report on transactions over $10,000 in digital assets or NFTs. The bill will go into effect in 2023.

Ahead of the April 18 tax deadline, consumers will still need to report their crypto holding, despite the 2023 bill.

For those still needing to file, the IRS issued a revised tax form, which specifies on the top of the first page asks whether the individual owns cryptocurrency or not.

“For most taxpayers who have fairly simple taxes, and they e-file, and they choose direct deposit, that process — for the most part — has been very smooth,” opined Mark Jaeger, VP of Tax Operations at TaxAct.

However, crypto holders face additional challenges in how they view crypto as compared to the IRS:

“It requires a conversation that clients weren’t expecting to have,” said Friedman LLP accountant Mike Greenwald. “They don’t think about digital currencies the same way the IRS does.”

Capital gains taxes and IRS-backed charitable contributions
Speaking to any crypto earning capital gains through a profitable sale, swapping digital coins, or making a purchase for an NFT – all could be considered “taxable events,” according to a recent report by CNBC.

Gain or loss refers to the difference between the purchase price (basis) and the value an individual receives when selling or exchanging. Consequently, those tax rates will vary depending on how long the individual has owned the digital assets. Depending on the taxable income, the individual may be eligible for long-term capital gain rates of 0% to 15% for digital assets they have held for longer than one year.

Otherwise, those who garner short-term gains could face regular income tax rates of up to 37 percent. Due to the limiting reporting from many crypto exchanges, it may not be as simple in calculating the crypto tax bill.

And don’t forget charitable donations. According to tax attorney Jonathan Shugart, one of the biggest problems for individuals who make charitable contributions is consolidating receipts.

“Most people do not report all of their charitable contributions at tax time, because they are not able to track down all of their receipts. If you do your charitable giving through your DAF, you have one receipt for all of your giving, no matter how many charities you make grants to,” he told Be[In]Crypto.

Shugart is also the founder of B Charitable, a 501(c)(3) recognized by the IRS as a tax-exempt public charity. The platform, as a DAF, harnesses the tax advantage of a charitable contribution and combines that with smart technology, crowdfunding campaigns, low fees, performance tracking, and tax-free investment growth – allowing every donor to receive the immediate tax benefits that come with an IRS-recognized charitable donation.

When it comes to the tax timing of a charitable contribution, Shugart advises to think of DAFs as a ‘charitable savings account.’

“You put your money into your DAF, you receive the tax benefit of making a charitable contribution at that time, and then you can either choose to grant that money out to your favorite charities immediately, or you can let it grow and make grants at a time that works better for you and the charities,” he explained.

What happens if you fail to report taxable activities?
In 2021, the digital asset market surpassed $2 trillion, with bitcoin hitting almost $69,000 in November and Ether rising to nearly $5,000 in the same period. Despite values falling in December, many investors recorded a significant increase.

For individuals who fail to report taxable cryptocurrency activity, they could be subject to interest, penalties, or even criminal prosecution. Milkwaukee-based CPA and tax specialist, David Canedo, says that consumers could also face tax fraud or tax evasion.

Canedo noted the difference in time periods, where purchasing Bitcoin in 2012 and subsequently, cashing out millions in 2021 is vastly different from small trades that yield a mere $100 profit – but that doesn’t relieve individuals from disclosing all details. He emphasized that “you’re playing with fire” if you choose not to report those investments, even with the IRS three-year lookback period for any errors, noting there is no statute of limitations for fraud.

In cases where a spouse or ex-business partner is involved, the IRS will certainly keep a close eye out.

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All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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