What cryptocurrency investors should know about filing taxes

If you invested in cryptocurrency last year, the US government wants a cut.

The Internal Revenue Service (IRS) is getting more serious about tracking virtual currency transactions, and for the 2022 tax year they are now directly asking if they received or sold digital assets during the past year on Form 1040, Form 1040-SR and Form 1040-NR .

If you’ve bought or sold crypto, there are three things to keep in mind at tax time.

One of the biggest misconceptions cryptocurrency investors have is that their cryptocurrency cannot, or will not, be taxed, Shehan Chandrasekera, a certified public accountant and head of tax strategy at crypto tax software company CoinTracker, told CNBC Make It.

But it can be. Since 2014, the IRS has treated virtual currency as property for federal income tax purposes, according to the agency’s website.

Like stocks, crypto is subject to IRS rules around capital gains and losses. That means if you made a profit by selling your crypto for more than what you bought it for, you will owe capital gains tax on the difference.

Let’s say you bought crypto for $500 and sold it for $600. The $100 difference will be considered a capital gain and subject to capital gains tax, which is generally taxed at a lower rate than ordinary income.

If you sold your crypto for less than what you paid for it, it will be considered a capital loss. The IRS allows investors to use capital losses to offset taxable capital gains. In addition, capital losses can be used to reduce your ordinary taxable income by up to $3,000 per year if your capital losses exceed your annual capital gains.

Other taxable events include if you’ve used crypto to buy a product like coffee or if you’ve been paid in crypto to do a job, says Chandrasekera. However, you usually won’t be taxed if you only bought crypto with fiat currency like US dollars, moved crypto from one virtual wallet to another, or received crypto as a gift.

Another misconception among crypto investors is that the IRS is unable to see your crypto trading activity, and therefore you don’t need to report it at tax time, says Chandrasekera.

Although crypto is supposed to be anonymous, regulators have a number of ways to connect your virtual activities to the real world.

If you trade on centralized exchanges like Coinbase or Gemini, those exchanges must report to the IRS. Typically, they will send you a 1099 miscellaneous form detailing any income you earned while trading crypto on their platform, says Chandrasekera.

Coinbase, for example, sends this form to customers who have earned more than $600 in crypto, according to its website. However, you must still report your earnings to the IRS even if you earned less than $600, the company says.

The IRS can also see your cryptocurrency activity when it subpoenas virtual trading platforms, says Chandrasekera. There can be thousands of names in the files that the companies send to the authorities, which the tax authorities can use to verify whether you have reported your trading activity to the authorities, he says.

And remember, even if you don’t use a major platform and don’t think the authorities will be able to track your crypto traders, you must still report income, gains or losses from all taxable transactions involving cryptocurrency, according to the IRS website.

“The biggest mistake people make with crypto is keeping accurate records of their transactions,” says Douglas Boneparth, a certified financial planner, president and founder of Bone Fide Wealth and a member of CNBC’s Financial Advisor Council.

It is largely up to investors to report cryptocurrency investments or earnings at tax time. That means you need to keep track of every purchase or sale and the specific details of those transactions, says Boneparth.

Tools like Cointracker can help you keep track of crypto transactions and automatically generate the necessary tax forms, says Chandrasekera.

Additionally, if you need more time to reconcile your crypto activity, you have the option to extend the submission deadline from April 18th to October 16th this year. But remember, if you owe money to the state, you still have to pay by the April 18 deadline, according to the IRS website.

More information on how the IRS taxes crypto can be found on the agency’s website.

DON’T MISS: Do you want to become smarter and more successful with money, work and life? Sign up for our new newsletter

Get CNBC’s for free Warren Buffett’s guide to investingwhich distills the billionaire’s #1 best advice for ordinary investors, dos and don’ts, and three key investment principles into a clear and simple guidebook.

Check out: This loophole can help crypto investors lower their tax bill – but don’t abuse it, CPA says