SheFi Newsletter

We’re All Gonna Make It Through Tax Season

Procrastinate [ proh-kras-tuh-neyt ] verb: an activity that occurs every April until tax deadline is a week away. It’s not that you like to wait until the last minute to finish your taxes, but you don’t enjoy feeling like a modern-day Nancy Drew solving the endless mystery your long transaction history and its minute details.

If your crypto taxes feel like a mystery, don’t worry, we’ve all been there.

Repeat after me: We’re all going to make it through tax season.

To help you along, SheFi hosted a conversation with TaxBit’s Amy Hatch, CPA, SME Tax Manager, and Michelle O’Connor, VP Brand & Communications, to answer crypto tax questions. We encourage you to listen to the full conversation Twitter Spaces here.

Maggie: Can you give an overview of the state of crypto taxes in the US?

Amy: Since 2019, the IRS has taken steps to help taxpayers report their crypto transactions more easily and accurately, including asking about crypto transactions on the face of tax returns. Recently, the IRS has moved from using the term "virtual currency" to "digital asset," which is broader and now includes NFTs. They have also provided more clarity on how to claim a charitable crypto deduction on tax returns. The IRS is committed to getting crypto taxation right and making it easier for taxpayers to do their tax returns.

Maggie: What is considered a taxable event in crypto?

Amy: Anytime you dispose of crypto, buy it, sell it or buy something with it, you're going to have a taxable transaction. Those transactions need to appear on your tax return. The way it's reported is similar to how you would report any property being sold at a gain or loss. You need to know when you bought it, the date you sold it, how much you paid for it, and how much you sold it for. The gain and loss from these transactions are reported on your tax return.

Maggie: What about trading between two tokens instead of selling into fiat?

Amy: Yes, disposing also includes trades. So what the IRS has said is if you are giving up one asset for another, then the asset you're giving up is considered a disposal. You need to report that on your tax return. You need to make sure you're valuing that at the right amount. So if I gave Bitcoin I got ETH. The value of the ETH and the Bitcoin that's traded is presumably the same. So the value that you traded that for is going to be the proceeds that you see on your tax return and then the cost basis, gain and loss will be calculated after that.

Maggie: So anytime the digital asset is leaving our hands for a digital asset or fiat currency, it's disposing and therefore taxable.

Michelle: Something important to call out to add on to what Amy just mentioned when you are filing your forms, you will be asked if you interacted or engaged with digital assets.

Maggie: That is important to note. So anyone who has interacted with a digital asset must report it even if it doesn’t have a taxable event?

Amy: Yes, if you've interacted with digital assets during the year, then you're going to want to make sure that you answer this question correctly and the IRS gets a fair amount of reporting from a lot of the common exchanges. We always say honestly on your tax return like chances are if you're not being honest, the IRS will find out about it and you don't want to go through the audit process.

Maggie: What if I transfer an NFT to a friend or they send me one?

Amy: So in this situation, I assume it's a gift you have, maybe some really cool crypto punk you want to send to your friend because they're also into it. That is not a taxable event. Simply gifting to a friend doesn't get reported on your tax return. This is a benefit of gifting.

Maggie: What an employer wants to pay me in USDC?

Amy: USDC is a stablecoin that's supposed to be dollar for dollar. You will report income in the amount of USDC you've got. That will be considered the cost basis. If you sell your USDC for actual fiat dollars, you do have to report that USD sale on your tax return. Presumably there's not going to be a gain or loss. It came in and was valued at $1. When you sold it, it was valued at $1. So there are two tax steps there. One is when you get it reported as income, and then when you sell it, you will have to report it again.

Maggie: Can I get a tax write off for donating to a cause in crypto?

Amy: There is absolutely a tax deduction available. I will put a little asterisk on this because it does have to be a qualified organization, meaning a public charity that's registered with the IRS. Donating appreciated crypto can be particularly beneficial as the gain or loss does not need to be reported on tax returns, and a charitable deduction can be claimed. It's important to keep accurate records for crypto donations, and using platforms such as "Crypto for Charity" can help find eligible organizations.

Maggie: Any final tips and advice?

Michelle: It's important to avoid waiting until the end of the year or January to handle crypto taxes. Checking your portfolio regularly and harvesting tax losses throughout the year can be advantageous. TaxBit is a helpful tool that makes tracking crypto taxes easy by partnering with major exchanges and providing resources like FAQs and a comprehensive blog. In TaxBit, you will spend a few minutes connecting your wallets, populating your transactions, and then downloading the forms for you. It is a quick and easy process, and downloading the forms is seamless and connected to TurboTax.

Hear the entire conversation here. Thank you to Michelle and Amy for sharing their expertise and guidance! Learn about TaxBit’s products to help you through tax season.

Additional Reading from TaxBit:

TaxBit’s Crypto Tax Guide

Navigating NFT Taxes

Crypto Tax Loss Harvesting

Join SheFi’s next expert series: Public Goods Funding with Gloria Kimbwala of Supermodular and Gitcoin. RSVP here: https://lu.ma/dre4j4kl

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