Hey everyone!
Sharing this week’s crypto tax guide below. Please let me know if these guides are helpful or not as well - will help me fine tune them moving forward.Â
Also, if you’re looking for tax help. Let us know here and we’ll work to get you paired up with quality tax professionals!
As a disclaimer, please note that the IRS still hasn’t issued crystal clear guidance when it comes to crypto, specifically DeFi and NFTs. Guidance to some of the questions will come from case law and rules for similar assets/investments. Please speak with your tax professional before engaging in any transaction as this is not formal tax advice.
Special thanks to @fintaxdude and @EmDeeEm for helping put this together!
Jan 27 Tax Questions:
If I move ETH from one wallet to another and incur a gas fee, is that considered a transaction and can the gas fee be deducted as a loss?
There’s no clear guidance from the IRS regarding gas fees so the best we can do is assume a similar tax treatment of securities. IRS Publication 551 states that financial assets can have their cost basis increased by costs associated with the purchase.
→ With this in mind, the following crypto transactions seem likely to fall under Publication 551 jurisdiction - buying, selling, swapping, yield farming, staking, airdrop claiming.
→ However, transferring crypto between personal wallets doesn’t involve the acquisition or disposition of an asset. So the answer lies in how conservative or aggressive of a position you want to take. You’ll want to work with a tax professional to get better guidance as the crypto tax law continues to evolve.
What happens if I don’t pay my crypto taxes?
Not properly filing or paying taxes on your crypto transactions put you at increased risk of an IRS audit, penalty, or criminal prosecution.
→ There is no statute of limitations for fraud or tax evasion, so the IRS can come after you at any time. In the case of back taxes, the IRS can even seize your crypto to cover unpaid balances.
→ The financial penalties include a failure-to-pay penalty of 0.5% per month, starting after the month in which it was due, an additional 5% one-time fee, and the interest on your outstanding balance.
What does a tax audit look like?
Most often, audits ask for additional clarification or supporting documents to fix a discrepancy between what you reported versus what they expected from your W-2s, 1099s, etc. If you’re faced with an audit, we recommend you work with a tax professional trained in IRS audits to help you put together documentation and supporting arguments.
→ If the audit is more serious, the IRS may look through your bank and credit card statements, trading behavior across platforms, and anything else related to your finances.
→ Unless you’re overtly committing tax fraud or evasion, you shouldn’t need to worry. In fact, of the 150 million federal tax returns filed each year, less than 1% of filers get audited.
Do I have to pay taxes if I’m gifted crypto or an NFT?
Most likely not! Receiving a gift is not a taxable event. However, the donor will likely owe a ‘gift tax’ if the value is above $16,000 and file IRS Form 709.
→ However, keep in mind that when you sell your gifted crypto, you’ll owe capital gains tax (if sold at a profit) and your cost basis will be the price at which the original buyer bought it at.
Should I take my salary in crypto instead of USD?
This is a tricky and complex situation. You should definitely work with a tax professional and financial planner before making a final decision.
→ The downside risks of accepting salary in crypto include:
Crypto is very volatile so you may take away a lot less than if you had been paid in USD instead.
There currently aren’t any crypto payroll companies that provide automated withholding, which means you’ll have to most likely make estimated quarterly tax payments. Most people getting paid in crypto forget about this.
The volatility in crypto may lead to you paying more in taxes than you eventually end up selling.
What we’ll cover in next week’s release:
TBD! Send me ideas of what you want to learn at jaimindesai@reconcilemoney.com!