For most individuals, tax returns for encrypted currencies can be a confusing and daunting task. The Internal Revenue Service (IRS) treats cryptocurrencies as assets subject to income tax. Knowing this seems to make it easier to apply for encrypted taxes, but the unique features of encryption represent a lot of problems that are difficult to solve.

Clearly reporting the income statement can be a nightmare. Although everyone who pays attention to the tax season knows that it is necessary to keep accurate records of every login password transaction, there are other things to keep in mind.

There is a big difference in short-term or long-term income tax, and the rate of levy varies according to various factors. This income tax rate is available online, far beyond the scope of the article, which focuses on avoiding potential difficulties with the IRS when paying encrypted taxes.

How to declare encryption tax

Paying encrypted currency tax is not an option, but a responsibility of every individual or company. Those who track his transactions, including the price at which they buy and sell the cryptocurrency, will be easier to report on his thematic activities.

Even those who do not receive all the tax documents related to the liquidity of encrypted currencies may have tax payables to report. In an interview with Cointelegraph, Oliver Zlatkin, senior vice president of taxation at Coinbase, a Nasdaq-listed cryptocurrency trading center, said:

Due to the effect of foreign taxes, encrypted property is called assets, and when there is a sale, swap or change of right to use (other than gifts), the operator should report the income statement. It is not a matter of tax payable just to seize or transfer the login code in the middle of the taxpayer's wallet.

Zlatkin added that even if the operator did not receive IRS report 1099, which refers to miscellaneous income, higher-level transactions "will be taxed if the right to use economic development changes, both literally and materially."

In addition, Danny Tarva, head of tax at Koinly, the encrypted tax calculation method, told Cointelegraph that investors can report profits and losses on cryptocurrencies based on booking D in statement 8949 and form 1040.

Investors who suffered cryptocurrency losses after last year's bear market may be able to save current or future tax bills based on tax losses, Tarwar said.

Tax loss collection and delivery refers to the immediate sale of securities at a loss in order to alleviate the income tax payable on the profit from the sale of other assets. The strategy is used to offset short-term or long-term capital gains. Zlatkin of Coinbase mentioned this countermeasure, saying: "the loss of selling or swapping login codes may result in a loss of assets, which can be used to offset capital gains and, to a limited extent, to offset some general gains."

Zlatkin added that losses "should not be fully reflected" because of intractable and unpredictable failures or fraud.

"operators should treat losses cautiously and give full consideration to the probability of loss of theft or fraud where objective facts are applicable."

He said that investors in the login password should consult him on all available tax breaks. Investors should also pay attention to the losses caused by "cleaning up market sales", which Zlatkin describes as "selling encrypted goods at a loss and buying back the same industry soon afterwards."

Peter Kemmerer, of CoinLedger, a cryptocurrency tax software company, told Cointelegraph that the loss achieved in 2022 could be an "opportunity" to reduce tax payments, offsetting capital gains and gains of $3000 a year.

David Kemmerer added that "it is most important to know that trading center and blockchain technical vapour costs are accompanied by tax incentives" because "costs directly related to the acquisition of cryptocurrencies can be added to asset cost costs."

Fees related to dealing with cryptocurrencies can be deducted from profits and can help reduce income taxes, he added.

Although the IRS has some clear and specific guidance on the taxes owed on trading encrypted currencies, if you delve deeper into the world of decentralized finance (Defi), the tax returns of people participating in this field are likely to become more and more complicated.

Application of DEFI, pile and fork tax pluralism

The application of Defi is likely to be very complex, and some countermeasures involve several agreements to maximize efficiency. It is very easy to lose contact between borrowing encouraged by cryptocurrency and airdrop transactions involving dynamic passwords of negotiable service providers.

According to Coinbase's Zlatkin, "most ways" of cryptocurrency rewards or profits are subject to foreign taxes when received.

He said that at this stage, foreign laws and regulations on chip income are not mature enough, and the IRS regards the chip reward as "when my operator is rewarded with chips that are 'manipulated and controlled' by the operator." or most of the taxable income will be generated when the property can be monetized.

When it comes to airdrops and bifurcations, CoinLedger's Kemmerer stresses that cryptocurrency bifurcations and airdrop income are subject to corporate income tax, just like income from any job. When plugs or airdrops cause a new cryptocurrency to be obtained, investors "determine the general income based on the fair value of the encryption," he said.

However, the cryptocurrency goes far beyond the scope of this use case. Many people use encrypted savings cards in their daily lives, which means that in the US government, they use assets to pay for goods or services. What happens when it comes time to inform the IRS?

The harm of tax revenue by applying encryption

Kemmerer feels that while defining cryptocurrency payments as asset transactions sounds like a complex ordeal, using encryption as a method of payment "is called a treatment of tax payable, just like selling your encryption or using your own encryption to get another cryptocurrency." He added:

"if you use cryptocurrency to buy directly, you will result in capital gains or losses, depending on the price fluctuations your login password has received since it was first received. "

"this is true even if the trading volume is small, such as buying a cup of coffee or pizza," says Coinbase's Zlatkin. " He added that if a payment was taxable when settled in cash, it would still have to be paid in encryption, emphasizing:

In addition, recipients are generally said to receive money in the investment, and then use this large amount of money to buy cryptocurrency, and they are taxed accordingly.

At this point, it is very clear that the payment of taxes related to the trading of encrypted currencies is a complex process that must be carefully considered. Cryptocurrency customers should consider all this and prevent the more common traps.

It is very important to keep records

Tax experts have repeatedly stressed that keeping records of every encrypted currency transaction is the key to avoiding an accident with the IRS. CoinLedger's Kemmerer stresses that without accurate records, "it is often difficult to measure the asset income statement."

He added that records generally include the date on which customers first received the cryptocurrency and the date on which they processed it. This is actually accompanied by the price of the cryptocurrency when it is accepted and processed.

Koinly's Talwar told Cointelegraph that because consumer cryptocurrencies are "more available than ever before, trading centers and products have a seamless interface", "it is often very easy to miss the total number of tax payables that may occur this year." Tarva added:

"We are prone to misunderstandings when we pay taxes on encryption. Many people don't realize that even if they don't sell the bottom call option, his reserve reward will be taxed as income when they receive it.

Tarva suggested that many of these people who participate in cryptocurrency consult tax professionals during the tax season to help them figure everything out.

For people, submitting encrypted taxes is likely to be prohibitive, bringing a new diversity to an area that is already ungrasped, and it continues to grow. Offsetting tax bills with potential losses can encourage experienced investors to explore in these areas, because even his losses can help ease his tax burden.

Because the law is still unclear about some of the more complex practices of the cryptocurrency industry, those who prefer to guard against risks and side with regulators need to consider preventing Defi. Either way, consulting professionals is cheaper and less stressful than solving IRS penalties and enforcement actions.