Cryptocurrency regulation is coming to the forefront of policymaking discussions in the US in 2022. Below is a quick set of considerations around the specifics of taxation for cryptocurrency investors in 2022.
This is not tax advice; consult your tax advisor.
Types of Income
There are dozens of categorization methods, but for this exercise, consider these two high-level categories of income:
Think compensation, wages, salaries. Also include tips, disability benefits, self-employment or 1099-MISC, and business owner income. "Earned".
Categories include investment income, pensions / Social Security / Annuities, alimony, and unemployment.
We're going to dive deeper into the Investment Income area specifically. Investment income is subject to a lot of political heat & scrutiny at the moment.
Impacts of cryptocurrency transactions
Save for professional traders (a separate area of consideration), trading crypto has clearly defined tax treatment. Similar to any other trades one might make, gains & losses in cryptocurrency are taxed in the year in which they are realized. Long-term rates are more beneficial than short-term rates (<1 year). State income taxes often apply. Wash sale rules are under scrutiny.
Your crypto-to-crypto trades are taxable at their fair-market dollar values at the time of trade. Please don't forget this. There are no tax-free exchanges.
No IRS guidance, but lending income is most logically taxed as investment income. That would make it subject to income taxes, excluded from FICA taxes, and calculated at the time of receipt.
Ditto with staking. The fair-market-value (FMV) calculations on this one are key as well. At the time of "Constructive Receipt" (a legal term for "when did you actually receive something"), your staking income is income. This can make accounting tough; if you received deposits on your Ethereum or Solana every two weeks, you need to calculate the value at the time you received it.
This is a gray area, but I'd loop it in with lending & staking. By my read, this should investment income, clearly not a capital gain.
One area of perhaps some good news. Mining, for now, under IRS Notice 2014-21, is definitely income, but you can consider it a business worthwhile of adding to Schedule C of your tax return, meaning you can deduct the expenses associated with mining. Think of equipment expenses, depreciation, electricity cost. All helpful. This approach would categorize mining as Earned Income.
- Generally, crypto taxation is very onerous!
- IRS guidance is missing huge areas of the crypto ecosystem.
- Most cryptocurrency exchanges are not (yet) providing consolidated reporting to clients or to the IRS (e.g. 1099-B that you would get from a brokerage at the end of each year.)
- Accountants and advisers are using best guesses with respect to taxation.
- Complexity of reporting increases with the number of wallets, transactions, & types of income created.
- Keep great records - see resources below for a few.
- Ask a tax pro (I can refer you)
- When in doubt, declare the income
- I advise against committing felony tax evasion
Crypto Tax Girl
Virtual Tax by Amy Wall, EA