A Real Wake-Up Call: Understanding Crypto Taxes
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Chapter 1: The Reality of Cryptocurrency
The world of cryptocurrency has just served up a sobering reminder: it’s time to settle up on taxes for my digital transactions.
Photo by Austin Distel on Unsplash
When I received an email from Coinbase, it dawned on me for the first time that the Bitcoin, Ethereum, and numerous other cryptocurrencies in my portfolio are not mere playthings. Unlike Monopoly money—something I’ve never actually swapped for real currency—these digital assets are very much real.
Since the inception of blockchain technology nearly ten years ago, skeptics have claimed that cryptocurrencies lack substance, viewing digital currencies as fleeting and worthless. However, the billions invested and the growing businesses built around these currencies argue otherwise. Still, I occasionally find myself treating the trading and selling of cryptocurrencies, as well as NFTs, as if it were a game—particularly since my current holdings are valued at less than $200, a figure that has plummeted recently.
The onset of tax season has shifted my perspective significantly.
Typically, my exchanges with Coinbase revolve around notifications about my investments’ fluctuating values or opportunities to earn small amounts of crypto by exploring new coins. The sheer number of cryptocurrencies can indeed make it feel more like a board game than a serious financial venture. However, Coinbase’s grim reminder about tax responsibilities included guidance on tracking my “taxable activity,” which covers sales, payments, and income. Alarmingly, it also highlighted that the digital wallet I rely on for managing my crypto assets doesn’t possess all the necessary information for accurate tax filing, such as cost basis and acquisition dates from other exchanges. This means I may need to consult various platforms to gather all relevant tax data if I had sold any NFTs, which I’ve struggled to do.
The reality is becoming increasingly tangible.
Given my wallet's diminished value and the fact that I haven’t profited from my initial crypto investments or NFT sales, my income remains significantly below the $600 threshold that would require Coinbase to issue a 1099 form for IRS reporting. To reach that point, my investments would need to triple.
It's important to note that Coinbase treats my modest crypto holdings with the utmost seriousness. They enforce two-factor authentication rigorously, and any significant change in my login devices prompts additional security measures. Yet, the whimsical names of various currencies, engaging educational lessons about them, and the ease of trading can create an illusion of playfulness.
Interestingly, Coinbase itself lacks the capability to handle tax reporting, necessitating a partnership with CoinTracker.
As I navigate the process of determining whether I owe taxes on my $35 in crypto earnings from 2021, the “Crypto Game” has lost some of its allure. This reflection also brings to mind the many young NFT millionaires who stumbled upon sudden wealth. Initially, they likely reveled in their fortunes until facing the reality of tax obligations from their crypto wallets.
That must be quite a shock, turning the blockchain experience from a whimsical gamble into something akin to a real-world slot machine, where substantial wins come with significant taxable implications.
Well, it was enjoyable while it lasted.