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Tax Season: Here’s What Crypto Investors Know in Filing Taxes After A Long Ride Last Season

Cryptocurrency

Internal Revenue Service Tax season has arrived, and crypto investors who were on board for the crazy ride that was 2021 are likely starting to consider the implications of this for their holdings.

IRS crypto transactions

Charles Kolstad, a partner at law firm Whiters who focuses on crypto assets and blockchains, said that any digital asset purchased and held for a period of time is treated as a traditional stock investment. But once a transaction is processed, it becomes taxable. Among other things, you can sell your crypto, exchange it for another coin, mine it, and earn interest.

According to MSN, Olya Veramchuk, director of tax solutions at Lukka, a crypto-asset data and software provider, said that while the Internal Revenue Service has published a comprehensive list of 46 frequently asked questions on its website, the agency still does not have a comprehensive list of cryptocurrency transactions.

In addition to this, there are profits from certain transactions that do not cleanly fall into any single category, such as wrapping tokens, contributing to and withdrawing from liquidity pools, and bridging multichain assets, among other things, as she explained in a blog post. This is why Veramchuk recommends that taxpayers seek professional advice if they are unsure.

For federal income tax purposes, virtual currencies must be classified as assets, not cash, according to IRS guidance issued in 2014. It wasn’t until 2019 that the IRS asked about cryptocurrency on a Schedule 1 form, and only in 2020 did they prominently post the issue on Form 1040, the documentation that US taxpayers use to complete their yearly income tax return.

Basic sources of income for crypto investors

According to Market Insider, investors in crypto should be informed of three basic sources of income, as Kolstad broke down.

  • Ordinary Income – operations such as staking and mining that generate a profit.
  • Short-term Capital Gains – assets that have been held for less than a year are subject to ordinary income tax rates.
  • Long-term Capital Gains – assets that have been held for more than a year and are subject to lower tax rates.

Veramchuk highlighted the many accounting procedures you can use to determine your capital gains or losses once you have selected your sort of income.

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