As 2021 wraps up, small business owners have a lot on their minds, especially when it comes to taxes. You need to make sure to log final donations to deduct; figure out distances driven for the IRS mileage rate; count your taxable inventory as well as determine the write-off value of inventory shrinkage-- plus a number of other tax considerations.
Despite that overwhelm, now is the perfect time to consider some important tax implications of cryptocurrencies for your small business. If you're currently holding crypto coins or tokens, here are four things every founder should know before filing their 2021 taxes.
This is not intended as financial or tax advice, but these are tax topics you need to be aware of so you can discuss them with your tax preparer or accountant. Going forward, the IRS is focusing on crypto tax dodgers so make sure to pay attention to the crypto tax rules now to avoid having to pay penalties, interest, and fines on unclaimed digital transactions later.
1. Track all crypto transactions with auto-tracking software
Keeping track of all your cryptocurrency transactions and dispositions is critical. That's the only way the IRS gets an accurate accounting of how much you originally paid for the digital asset and whether it was sold at a profit or loss.
If you haven't been doing that, you're in luck. All you need to do is link the crypto-trading exchange you use with one of the crypto-tax-tracking services/software that's available. Those tax programs automatically scrape the blockchain for your specific recorded transactions and generate a completed IRS Form 8949, which you'll need to give to your tax preparer or include with your filing if you prepare your own taxes. Two easy-to-use crypto tax services you may consider are TaxBit or Cointelli.
2. Know that cryptocurrencies are classified as property.
The IRS currently categorizes crypto as property so they're susceptible to short- and long-term capital gains taxes when you sell digital currencies. Basically, if you hold crypto for less than a year, you'll pay a short-term gain that ranges between 10 - 37 percent, as of this writing, based on your income and filing status. Long-term gains tend to be lower and can be between 0 - 20 percent. Your accountant will know those specifics.
3. Harvest tax losses with crypto-- for now
Right now cryptocurrencies aren't covered by the "wash sale rule" that stocks are. The recent crypto downturn provides an opportunity to harvest deductible tax losses that can be carried over for years. Say you bought Bitcoin at the market peak of more than $69,000 per coin in October, you can sell those assets at today's price of $48,732 per coin. That transaction would be logged as a loss on the blockchain.
You can then turn around and immediately repurchase the same number of coins you just sold. Basically, you still own the same number of coins before the sale, but you've just locked in a deductible loss that can be spread out for years. While you're not allowed to do this with stocks because of a required repurchase waiting period, it's a legal loophole for crypto that's still available-- but will likely be closed soon.
4. Some digital asset actions are taxable-- some are not
Generally speaking, you're taxed on the crypto you've earned or the disposition of your digital assets. Whereas you're not taxed for crypto movement or transfers between digital wallets or exchanges-- unless you're sending it to someone's wallet as a gift, at which point gifting tax rules may apply-- be sure to ask your accountant how that works. The IRS has a fairly comprehensive FAQ section that outlines a range of transaction scenarios that are worth reviewing for anyone who owns, earns, or trades virtual currencies.