Now that it is time to file your freelance taxes, you will have questions on methods to report your cryptocurrency (now known as “digital belongings” as a substitute of digital currencies by the IRS). Why is it so necessary, particularly this 12 months, to rigorously report your exercise with digital belongings?

The penalties for failing to report cryptocurrency exercise might be vital. IRS can impose a penalty of as much as $250 per buyer, as much as a maximum of $3 million, if the Kind 1099 isn’t well timed filed with the IRS below IRC 6721, and a penalty of as much as $250 per buyer, as much as one Most penalty of $3 million for failure to offer the consumer with an accurate IRC 6722 1099 type in a well timed method. These penalties might be diminished if such errors are corrected in a well timed method.

That can assist you perceive the affect of digital belongings in your tax return, listed below are solutions to some frequent questions on reporting them in accordance with the most recent digital asset tax legal guidelines:

What’s a digital asset within the eyes of the IRS?

Based on the IRS, “a digital asset is a digital illustration of value that’s recorded in a cryptographically secured distributed ledger. Widespread digital belongings embody:

• Convertible digital forex and cryptocurrency
• stablecoins
• Non-Fungible Tokens (NFTs)”

All cryptocurrency exchanges at the moment are additionally thought of “brokers,” very similar to conventional funding brokers, and digital belongings are thought of securities within the eyes of the IRS, very similar to stocks, bonds, and sure forms of commodities. ‍Subsequently, the tax remedy of digital belongings is actually the identical as earlier than: you’re topic to tax on capital good points.

Does everybody must declare their digital asset actions on their tax return?

Sure, even for those who didn’t have any digital asset transactions, you should reply the digital asset query on the prime of your Kind 1040 and report all digital asset-related earnings when submitting your 2022 federal earnings tax return.

For tax 12 months 2022, the digital asset query it is advisable to reply is: “At any time in 2022, did you: (a) obtain (as a reward, bounty, or fee for property or companies); or (b) sell, barter, give away, or in any other case eliminate a digital asset (or financial curiosity in a digital asset)?”

When do I reply sure to the digital asset query on my tax return?

The IRS states that you should examine the “sure” field for those who:

• Digital belongings acquired as fee for property or companies supplied;
• Digital belongings transferred free of charge (with out consideration) as a present in good religion;
• Digital belongings acquired ensuing from a reward or award;
• Obtained new digital belongings ensuing from mining, staking and related actions;
• Obtained digital belongings ensuing from a tough fork (a fork of a cryptocurrency’s blockchain that splits a single cryptocurrency into two);
• Promoting digital belongings in alternate for property or companies;
• Promoting a digital asset in alternate or alternate for one more digital asset;
• sells a digital asset; or
• In any other case divested different financial curiosity in a digital asset.

How do I report earnings from digital belongings?

Except for ticking the “Sure” field, all income associated to digital asset transactions should be reported. For instance, for those who held a digital asset as a set asset and offered, exchanged, or transferred it in 2022, you should use Kind 8949 Gross sales and Different Tendencies of Capital Belongings to calculate any capital good points or losses on the transaction after which to report on Schedule D (Kind 1040), Capital Beneficial properties and Losses, or Kind 709, United States Reward (and Technology-Skipping Switch) Tax Return, within the case of a present.

In the event you paid an worker with digital belongings, you should report the value of these belongings acquired as wages. In the event you labored as an impartial contractor and have been paid in digital belongings or did it for a contractor you employed, you should report earnings on Schedule C (Kind 1040), Business (Sole Proprietorship) Revenue or Loss. Schedule C should even be used in case you have offered, bartered, or transferred digital belongings to purchasers in reference to a business or enterprise transaction.

When ought to I reply “no” to the digital asset query on my freelance federal tax return?

In case your solely publicity to digital belongings in 2022 was possession and also you didn’t transact, you might examine the “No” field on Kind 1040. The identical applies, in keeping with the IRS, in case your digital asset actions have been restricted to:

• holding digital belongings in a pockets or account;
• transferring digital belongings from one pockets or account they personal or management to a different pockets or account they personal or management; or
• Buy digital belongings with US or different real-world currencies, together with by digital platforms resembling PayPal and Venmo.

What different reporting requirements relate to digital belongings for freelance tax returns in 2022?

In 2022, new cryptocurrency laws was handed below the IIJA, a positive signal that regulating digital currencies from a tax perspective is a precedence for the federal government.

Which means that it’s extra necessary than ever to have a great document of your digital asset exercise and to work with respected sellers and platforms. Contemplate these developments on this space when submitting your tax return.

Reporting necessities at the moment are stricter for cryptocurrency exchanges, which at the moment are required to report data to each the IRS and their purchasers. As we touched on in the beginning of this text, whereas there are not any reporting necessities for digital asset exchanges for tax 12 months 2022, some exchanges could ship you tax kinds resembling Kind 1099-MISC, which solely covers the withdrawals acquired, not the capital good points in associated to your crypto exercise.

The brand new regulation states that the next data should now be reported to the IRS and prospects: (1) every buyer’s title, deal with, and cellphone quantity; (2) the gross proceeds from the sale of digital belongings; and (3) capital good points or losses and whether or not these capital good points or losses have been short-term (held for one 12 months or much less) or long-term (held for multiple 12 months).

The laws doesn’t specify which IRS kinds cryptocurrency exchanges should ship to their purchasers, however Kind 1099-B (“Proceeds from Broker”) appears cheap.‍

One other main improvement within the IIJA is that digital belongings valued at $10,000 or extra at the moment are handled as “money” acquired by anybody conducting a commerce or enterprise‍

The regulation states: “Any particular person conducting a commerce or enterprise who receives greater than $10,000 in money should file IRS Kind 8300 (“Report of Money Funds Over $10,000 Obtained in a Commerce or Business”) .” This manner requires you to offer: (1) the title, deal with, and TIN of the particular person from whom “money” was acquired; (2) the quantity of “money” acquired; and (3) the date and sort of transaction.

These new reporting necessities will come into impact on January 1, 2023. Which means exchanges do not must mail you the 1099-B till 2024 (for 2023 taxes).

Preserve a detailed eye in your digital asset transactions to keep away from tax time points.

Begin getting ready your freelance tax return now, particularly if it is advisable to embody cryptocurrency transactions. Making certain you’ve got all the required documentation associated to your actions will make it a lot simpler to do your taxes effectively and you’ll be profitable subsequent 12 months when tax reporting necessities are much more stringent.

Jonathan Medows is a NYC-based CPA specializing in tax for consultants throughout the nation. His website has a useful resource part with guides and knowledge for freelancers. https://www.cpaforfreelancers.com/