According to a survey by crypto wallet tracking and tax software company CoinTrackeronly 4% of digital currency investors had not submitted their taxes by March 27 – and 75% of them were not even ready to do so.
More worryingly, most survey respondents failed to identify the tax consequences of daily digital currency transactions. According to CoinTracker, only 3% of respondents could correctly identify all cryptocurrency situations that would require them to pay income tax.
There are many common misconceptions about ever-changing cryptocurrency tax laws that can mislead investors. More importantly, investors only need to report when cashing in US dollars. This is definitely not the case. When cryptocurrency is sold or exchanged for another coin, digital or physical, or even used for a purchase, it can trigger capital gains or losses that must be reported.
For those who have owned their crypto for less than a year, their earnings are taxed at their normal income tax rate. However, those who have owned their crypto for more than a year could benefit from long-term capital gains rates.
The capital gains tax rate for single filers earning up to $40,400 per year is 0%. Filers earning up to $445,850 are taxed at 15% and those earning more are taxed at 20%. Additionally, investors should report if they have sold or traded crypto at a loss.
This is the second year the Form 1040 has included a question about cryptocurrencies. He asks, “At any time in 2021, did you receive, sell, trade, or otherwise dispose of a financial interest in any virtual currency?” and must be answered by all taxpayers, whether or not they bought or sold crypto in 2021.
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