Filing your IRS declaration is a must for many taxpayers. If you earned income in 2023, you need to submit your declaration between April 1st and June 30th, 2024.
Key Steps to Fulfill Your IRS Obligations When Declaring Crypto Assets
"Cryptoassets: Understanding Their Treatment in the IRS Code"
Following years of no regulation, the IRS Code now incorporates the classification of crypto assets, along with those specifically excluded from its definition.
In the IRS Code, particularly in Article 10, sections 17 and 18, it's clarified that any digital representation of value or rights, transferable or storable electronically using distributed ledger technology or similar means, falls under the definition of cryptoassets. However, unique cryptoassets, like NFTs, which are not interchangeable with others, are excluded from this classification.
To simplify, fungible crypto assets are those that can be traded for similar ones, such as cryptocurrencies and stablecoins. On the other hand, non-fungible assets represent ownership of unique and irreplaceable digital assets, like NFTs and blockchain-based artwork.
Setting aside these definitions, what most taxpayers are interested in is how crypto assets are taxed. As transactions with cryptoassets occur directly between members of a virtual community without financial intermediaries, the 2023 State Budget determined that the taxation of cryptoassets by the IRS depends on whether they result from personal or business activities.
Personal Cryptoassets: Guidelines for Declaring Income and Timing
Navigating the taxation of personal crypto assets involves understanding several key points. Firstly, when an individual sells crypto assets and receives others in return, such as exchanging Bitcoin for Ethereum, no tax is incurred on this transaction.
Another common query pertains to the appreciation of crypto assets held over time. Under current regulations, only when converting them into fiat currency ("FIAT") do you need to declare them to the IRS, regardless of their significant increase in value.
However, certain scenarios may trigger taxation, even for private transactions. For instance, when cryptoasset activities are solely for investment purposes and generate returns, they fall under income from capital (category E), as seen in Staking or Farming operations. But if these returns are paid in crypto assets and later converted into FIAT, they are categorized as capital gains (category G) upon sale.
The most common situation for many taxpayers involves earning income through buying and selling crypto assets. This is classified as category G, taxed as capital gains when converting into FIAT. Notably, assets acquired or gained less than 365 days ago cannot be considered securities to fall into this category.
What is the tax liability on surplus value?
Taxation is imposed on capital gains at an autonomous rate of 28%. However, taxpayers have the option to choose aggregation according to CIRS regulations. Yet, if the asset is held for more than 365 days, the code allows for an exemption from these capital gains.
A frequent question arises regarding the calculation of capital gains, which is done using the FIFO (First in, First Out) method. In essence, this method involves using the value and acquisition date of the most recently purchased cryptocurrency assets to calculate the capital gains. Moreover, the selling price is assumed to be the market value at the time of selling the cryptocurrency assets.
What will occur if I receive income in 2023 from crypto assets obtained through a business endeavor?
Income earned from cryptocurrency activities such as mining or validating transactions using PoW and PoS mechanisms is classified under category B by the IRS. In this category, earnings may be subject to either the simplified regime or the organized accounting regime, which requires the assistance of a Certified Accountant.
When operating under the simplified regime, taxable income is determined by applying certain coefficients: 0.95 for crypto-asset mining and 0.15 for crypto-asset operations. Due to the intricate nature of these computations, obtaining expert guidance can be beneficial in meeting legal tax and reporting requirements.
How to Complete the IRS Declaration for Income from Crypto Assets?
Understanding the Fields Required for Reporting Income from Crypto Assets Post-Ordinance No. 39-B/2024"
Annex G
It is essential to finalize the category G income section, focusing on capital gains obtained from transactions with crypto assets. In Annex G, you will be required to provide details for:
Table 18 A – This part is dedicated to documenting the sale of crypto assets that are not considered securities and were held for under 365 days.
Table 18 B – This section is specifically for individuals who have sold crypto assets that are not classified as securities, but it only applies to taxpayers who are no longer residents in Portugal.
Pay attention to the "Managing Entity" column. In this section, you need to input the NIF (Tax Identification Number) of the person, business, group, or entity responsible for managing and overseeing the custody and administration of cryptocurrency assets on behalf of third parties. This requirement also stands if there are one or more cryptocurrency exchange platforms involved.
ANNEX G1
Annex G1 is referred to as the untaxed capital gains annex. Consequently, in this annex, you will likely only be required to complete table 7, for reporting income derived from the sale of crypto assets held for over 365 days or if the taxpayer is no longer a tax resident in Portugal.
ANNEX J
Lastly, within category G income, Annex J pertains to income earned from foreign sources. In this particular scenario, you are required to populate table 9.4 if you need to report income from the overseas sale of crypto assets held for less than 365 days or upon losing tax residency in Portugal.
It is important to ensure that all sections concerning acquisition cost and date, sale value and date, expenses, source country code, foreign taxes paid, and counterparty's country of residence are duly completed.
What is the process for filling out the IRS form if your income belongs to category B?
Just like any other category B income, taxpayers are required to submit IRS Annex B to report professional income earned through cryptoassets. Consequently, the following tables need to be filled out:
Table 3 – Activity code corresponding to the one stated at the beginning of the activity declaration. It is important to note that the list of activities in Article 151 of the CIRS does not cover services related to cryptoassets. As a result, there is currently uncertainty regarding the appropriate CAE code to use.
Table 4 – Field 419: shows the income generated from transactions involving cryptoassets (the total amount received from trading). In field 422, you should disclose the overall gross value derived from income related to cryptoasset mining.
Kindly, Remember to complete the fields in table 13 G, specifying if you conducted transactions involving cryptocurrencies and your residency status in Portugal.
Given that this is the first year that taxpayers may have to declare income from crypto assets and there are still many unanswered questions, you may have some difficulties filling out your IRS declaration. Therefore, to avoid problems, we advise that if in doubt, you ask for advice from a certified accountant who specializes in crypto assets.
At Inlis Consulting, with over 12 years of experience, we have focused our expertise on crypto assets. Therefore, feel free to reach out to us through your preferred contact method if you require assistance.
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