It has been a record year for the cryptocurrency market, which exceeded $ 3 trillion in value in November. Major cryptocurrencies like bitcoin and ether too reach all-time highs.
This widespread adoption led to an increased focus on regulating cryptocurrencies by lawmakers. Throughout the year, they discussed the investor protection framework, taxes and more. Because of this, more regulations are likely to come.
If you were among the many trading cryptocurrencies or other digital assets last year, here are three things you need to do now to prepare, starting with how to prepare for the upcoming tax season.
1. Get organized
Cryptocurrency Investors must report their taxable transactions involving bitcoin, ether, dogecoin, and other digital currencies to the federal government on their 2021 tax returns.
If that's you, start by calculating your profit or loss. Although this can be difficult if you have multiple wallets and use different exchanges, as is common, it is up to you to figure everything out yourself. The Internal Revenue Service (IRS) requires investors to keep records "Enough to establish the positions taken on tax returns," according to its website.
Prioritizing good record keeping is critical. Although it depends on your personal factors, it is best to keep your cryptocurrency transaction history for at least three yearssays Shehan Chandrasekera, a certified public accountant and head of tax strategy at cryptocurrency portfolio tracker and tax calculator CoinTracker.
2. Start tracking
In the future, you may also want to use a trusted cryptocurrency and portfolio management software tool that tracks transactions, calculates profit and loss, and stores evidence.
This is one way that investors can "accurately build their tax profile and show the IRS their actual tax liability," Chandrasekera. previously told CNBC Make It.
Additionally, it can be helpful to work with a CPA who can guide you through the reporting process and help you plan for the future, especially with the growing possibility of increased regulation of cryptocurrencies.
3. Be aware of the next regulation
Throughout the past year, there has been an increased focus on regulating cryptocurrencies. Although it is impossible to predict what will be in place, it is good to be aware of what legislators are discussing.
In the Build Back Better Act, lawmakers propose enforce "wash sale" rules on commodities, currencies and digital assets in 2022. If approved, this would prevent crypto investors from immediately buying back the same asset after selling at a loss.
And the bipartisan infrastructure bill enacted in November includes Tax reporting provisions that apply to digital assets such as cryptocurrencies and non-fungible tokens, or NFTs, and require cryptocurrency brokers to report cryptocurrency earnings on a 1099 form type.
However, the provisions won't go into effect until January 2024, and in the meantime, lobbyists within the crypto industry plan press for amendments Y separate invoices to adjust them.
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