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Crypto Briefing brings you a comprehensive guide on calculating cryptocurrency tax liabilities for 2022.
The Crypto Tax Guide
As we enter the new year, most cryptocurrency traders and investors will have tax deadlines looming. In the United States, the Internal Revenue Service will be opening up the filing process for taxpayers from Jan. 24, with last year’s tax returns due by Apr. 18. That means that tax returns filed in 2022 will apply to the 2021 tax year; taxes for 2022 will be due in April 2023.
The IRS first published its guidance its guidance on taxing cryptocurrencies in 2019, and many other countries have adopted similar policies. As such, active crypto traders, DeFi enthusiasts, and NFT collectors need to pay attention to their tax obligations. Before filing taxes, the most important step is to take note of all crypto transactions that trigger taxable events.
Such transactions include selling crypto assets like Bitcoin and Ethereum for cash or other assets, receiving airdrops, crypto mining, staking, and yield farming. It’s also important to be aware of the type of tax that applies to each transaction. Those that trigger taxes fall into two main categories–income tax and capital gains tax. Both are reported differently in tax returns. This feature covers the topic in detail.
Income Tax
In the U.S., income tax applies on crypto assets received through staking, yield farming, as part of a salary, or in exchange for a good or service. Income tax is charged at the regular tax rate according to earnings. It applies to compensation earned from employment, including salary and royalties. Other earnings such as dividends and commissions are also subject to income tax.
All crypto assets received from lending, yield farming, airdrops, and governance token rewards are subject to income tax according to the market value at the time the user receives them. Whenever a user receives coins in their wallet, the market price in fiat terms can be used as the cost basis for reporting gross income.
In the U.S., the gross income must be reported on Form 1040, which is used for filing individual income tax returns. Income tax rates fall under seven brackets ranging from 10% to 37%. It’s worth noting that there is also a standard tax free deduction on income in the U.S. The deduction is set at $12,550 for the 2021 tax year and $12,950 for the 2022 tax year.
Capital Gains Tax
According to the U.S. Internal Revenue Code, capital gains are made from selling or exchanging capital assets like stocks and cryptocurrencies, and other properties used for investment purposes.
Capital gains or losses must be calculated when an asset is sold, swapped, or exchanged for fiat money,…
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