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August 28, 2022

Freelancers, Cryptocurrencies, and Taxes. How Do They All Fit Together?

The global employment landscape has been changing drastically over the last couple of decades. More than 53 million individuals, in the US alone, are doing some sort of freelance work – that’s 34% of the U.S. national workforce! The freelance community has also been one of the biggest and most vocal proponents of the crypto revolution. According to a survey last year, 29% of all US-based freelancers said that they prefer receiving a part of their payments/salaries in crypto. …

The global employment landscape has been changing drastically over the last couple of decades. More than 53 million individuals, in the US alone, are doing some sort of freelance work – that’s 34% of the U.S. national workforce! The freelance community has also been one of the biggest and most vocal proponents of the crypto revolution. According to a survey last year, 29% of all US-based freelancers said that they prefer receiving a part of their payments/salaries in crypto.

The IRS has been ramping up its efforts for tracking down crypto tax dodgers lately so if you are one of the freelancers getting paid in crypto, it is worth going over your past tax filings! In this article we will look at how cryptocurrencies are taxed and how you go about preparing and filing them.

How does crypto taxation work?

In the United States, cryptocurrencies are classified as ‘property’ rather than cash. This means that crypto owners are required to report both their capital gains – arising from the disposal of crypto – as well as any income received in crypto. It is worth mentioning that digital currency trades (ex. exchanging BTC for ETH) are also classified as “taxable events” and result in capital gains!

As a freelancer, when you receive payment in cryptocurrencies, you should take note of the value of the crypto received and declare it in your annual return. When you dispose of the crypto you can deduct the value declared in your annual return from the selling price. The difference should be reported as a capital gain.

Who needs to pay tax?

Many a time crypto holders are not even aware of the fact that they might owe the government some taxes. Some things we generally consider to be tax-free activities are in fact liable to taxation, for ex. the following are all taxable activities:

  • Selling or trading digital currencies
  • Paying for goods/services
  • Receiving payments via Bitcoin, Ether, Airdrops, etc.

The type of tax you have to pay can be somewhat complicated to determine but as a general rule of thumb, if you are receiving crypto that you have not expressly bought – it should be declared as income. If you are transacting with crypto you already own (and have paid tax on) – it will result in capital gains. The only exception is if you are moving funds between your own wallets. It may be worth consulting a crypto tax guide if you have a complicated history of transactions.

Filing 101: The Heavy Lifting

  1. Generate an Account of All Your Crypto Transactions

To start off with, you need to create a single consolidated sheet containing all your crypto-related transactions from the previous financial year — relevant tx’s include payments received in crypto, airdrops, forks and trades. Even though crypto purchases are not taxed, you will need them to determine the cost-basis when you eventually sell that crypto, so it’s worth adding these to your sheet as well.

  1. Calculate Your Annual Gains/Losses:

After you have formulated a detailed report of your crypto activity, you will need to assess whether you incurred gains or losses on each individual transaction by subtracting the cost of the crypto from the selling price. The cost has to be calculated using either FIFO (recommended) or LIFO.

This is usually the most time-consuming step in the process but also the most crucial. If you have lots of transactions you may want to look at crypto tax software such as Koinly to automate this part of the process for you.

  1. Determine Which Forms You Need To File

There are several forms that crypto holders need to be aware:

  • Form 8949: In this form you will need to list out all your capital gains/losses. This is where the consolidated sheet you (hopefully) created in the previous steps comes handy.
  • Schedule D: This form is essentially a summary of the 8949.
  • Schedule 1: Declare your income from cryptocurrencies in this form under section ‘Other income’..
  • FBAR / FATCA: The IRS recently clarified that crypto holders do not need to report their holdings in accordance with FBAR/FATCA. This is being mentioned here to avoid confusion as a lot of tax accountants had been recommending these forms up until recently.

Once you’ve got all your records in order, it is time for you to submit your documents and wait for your returns to come through. The deadline for this is the 15th of April.

Final Words

When it comes to crypto taxes, it is of utmost importance to keep accurate records of all your income and trading activity. The blockchain is not as anonymous as many believe, when the IRS finds one of your blockchain addresses – all your transaction history lies exposed.

If you find yourself trapped in tax-hell you should consider hiring the services of a crypto tax professional who can likely help you save your hard earned crypto!

Robin Singh is the co-founder and CEO of Koinly.io – a cryptocurrency accountancy and tax reporting platform that simplifies capital gains reporting in the US, Australia, Ireland, among other countries.

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