According to a survey from crypto portfolio tracking and tax software company CoinTracker, only 4% of digital currency investors had not submitted their taxes as of March 27 – and 75% of them were not even ready to file.
More worryingly, most survey respondents could not successfully identify the tax consequences of everyday digital currency transactions. According to CoinTracker, just 3% of those surveyed could correctly identify all of the cryptocurrency situations that would require them to pay income tax.
There are many common misconceptions about the ever-evolving cryptocurrency tax laws that may be misleading investors. Most prominently, investors only need to report when they cash out in U.S. dollars. This is definitively not the case. When cryptocurrency is sold or exchanged for another coin, digital or physical, or even using it for a purchase, it may trigger capital gains or losses that need to be reported.
For those who have owned their crypto for less than a year, their gains are taxed at their normal income tax rate. Those who have owned their crypto for more than a year, however, might qualify for long-term capital gains rates.
The capital gains tax rate for single filers earning up to $40,400 a year is 0%. Filers who earn up to $445,850 are taxed at 15%, and those who earn more are taxed at 20%. Additionally, investors need to report if they sold or exchanged crypto at a loss.
This is the second year the 1040 form has included a question about cryptocurrencies. It asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any 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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