Its Never Too Early To Get Your Crypto Taxes in Order

After a tumultuous year, crypto traders might want to start getting information for their taxes in order today.

There’s currently no requirement for crypto brokers to set up traders with the tax forms they need, so the responsibility falls on individual investors, according to Erin Fennimore, head of tax and information reporting solutions at TaxBit.

When trading stocks and bonds, investors receive tax forms and corresponding information from brokers, but crypto exchanges do not operate under the same guidelines, Fennimore said. Until — or if — the IRS requires crypto brokers to provide investors with 1099-B forms, which track capital gains and losses, traders need to be especially vigilant, she added.

“Investors are asking themselves, ‘How in the world am I going to figure out my own taxes?’” Fennimore said. “For investors, it can be really difficult, especially when you’re transacting outside of a centralized exchange.”

Plus, this year, reporting is going to be different with the updated 1040 form, which now asks taxpayers to disclose any “digital asset” trading activity, a change from last year’s mandate for “digital currency.”

“With this change in verbiage, I think it is making sure people understand that digital assets can include more than just a token— it can be a much broader asset,” Fennimore said. “I think they are trying to, frankly, close the tax gap of what people are reporting.”

One segment of the market the IRS is likely worried will slide under the radar is NFTs, Fennimore said, which already can be complicated enough to deal with from a tax perspective. NFT owners have previously — generally — reported the asset as a collectible on their taxes, but their digital nature adds to the challenge.

“There’s different tax rates for collectibles, but also, collectibles like a fine piece of art are appraised as part of that valuation, but can you actually appraise an NFT as a collectible?,” Fennimore said.

Added Fennimore: “Obviously, when the NFT has been resold, you have that actual fair-market value price of the NFT, but an NFT for a creator could potentially not have an actual fair market value, which goes to the whole argument of should there actually be a valuation or appraisal process for NFTs and who would be appropriate to do that?”

This year also brings another unique challenge with FTX and FTX US’ bankruptcy filing. Investors with tokens and funds locked on the exchange will have to wait until the proceedings conclude before claiming any losses on taxes.

Fennimore’s bottom line for traders? Get organized now.

“Start preparing earlier than you ever think,” she said. “Especially with what’s happened in the market over the last year, it’s not going to be a seamless experience.”

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