Welcome to Chainwise CPA’s Crypto Taxation FAQs! Our expertise in cryptocurrency tax services helps clients navigate the complex tax landscape with confidence. Here are some common questions we receive:

1. What are taxable events in cryptocurrency?

Examples of taxable events include:

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2. Do I need to pay taxes on my cryptocurrency holdings?

Yes, you may need to pay taxes if you sell, trade, or use your cryptocurrency. Simply holding cryptocurrency without making transactions does not trigger a tax event. However, once you engage in any taxable activity, you must report it.

3. How are capital gains on cryptocurrency calculated?

Capital gains are calculated as the difference between the selling price and the purchase price (cost basis) of the cryptocurrency. If you held the cryptocurrency for more than a year before selling, it is considered a long-term gain and may be taxed at a lower rate. Short-term gains, on assets held for oneyear or less, are taxed at ordinary income tax rates.

4. What records do I need to keep for cryptocurrency transactions?

It’s crucial to maintain detailed records of all your cryptocurrency transactions. This includes dates, amounts, value at the time of the transaction, and the nature of the transaction (buy, sell, trade, or use). Good record-keeping is essential for accurate tax reporting and compliance.

5. How is cryptocurrency income taxed?

Income earned from activities like mining, staking, airdrops, or receiving crypto as payment for goods or services is taxed as ordinary income. You must report the fair market value of the cryptocurrency in USD as of the date of receipt.

6. Can I use losses from cryptocurrency to offset gains?

Yes, you can use capital losses to offset capital gains from crypto transactions or other investments, reducing your overall tax liability. If your losses exceed your gains, you can deduct up to $3,000 ($1,500 if married filing separately) of the excess losses against other income. Unused losses can be carried forward to future years.

7. What happens if I don’t report my cryptocurrency transactions?

Failure to report cryptocurrency transactions can result in penalties, interest, and even criminal charges in severe cases. The IRS has been increasing its scrutiny of cryptocurrency transactions, so compliance is crucial.

8. How does the IRS find out about my crypto transactions?

The IRS can discover taxpayers’ crypto activities through information reported by cryptocurrency exchanges and brokers via Form 1099s. It also utilizes advanced data analytics and blockchain tracing tools to identify unreported crypto transactions and track the movement of digital assets. Additionally, international agreements like the Common Reporting Standard (CRS) and compliance initiatives, such as audits and subpoenas, enhance the IRS’s ability to identify unreported crypto transactions and address tax evasion.

9. Why shouldn’t I rely solely on crypto tax software to prepare my tax report?

While crypto tax software can be a helpful tool, it should not be relied upon exclusively for accurate tax calculations. These programs often lack the sophistication to automatically reconcile accounts or correctly classify all the transactions. Some also cannot handle complex transactions, such as DeFiactivities, NFTs, crypto loans, cross-chain transactions etc. At Chainwise CPA, our experts provide thorough account reconciliation and tax report reviews to ensure complete and accurate reporting.

10. Why shouldn’t I rely solely on Form 1099-DAs to report my crypto taxes?

Form 1099-DAs, issued by exchanges etc., may not capture the complete picture of your crypto activities. They often include only gross proceeds and fail to account for cost basis, resulting in inaccurate tax calculations. Additionally, not all transactions, such as transfers between wallets, or transactions executed on foreign exchanges, are reported on these forms. Relying solely on Form 1099-DAs can lead to incorrect crypto tax reporting, most likely overstating your tax liabilities. At Chainwise CPA, we ensure that all your transactions are accurately tracked and reported, providing a comprehensive tax solution.

Have more questions? Feel free to reach out to us at [email protected]. At Chainwise CPA, we are dedicated to making your crypto tax experience seamless and hassle-free.