It's been a record year for the cryptocurrency market, which surpassed $3 trillion in value in November. Top cryptocurrencies like bitcoin and ether also hit all-time highs.
This mainstream adoption led to an increased focus on cryptocurrency regulation from lawmakers. Throughout the year, they debated framework on investor protections, taxes and more. Because of this, further regulation is likely to come.
If you were among the many trading cryptocurrency or other digital assets this past year, here are three things to do now to prepare, starting with how to get ready for the upcoming tax season.
1. Get organized
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Cryptocurrency investors must report their taxable transactions involving bitcoin, ether, dogecoin and other digital coins to the federal government on their 2021 tax returns.
If that's you, start by calculating your profits or losses. Although this can be difficult if you have multiple wallets and use different exchanges, as is common, it's up to you to sort everything out yourself. The Internal Revenue Service (IRS) requires investors to keep records "sufficient to establish the positions taken on tax returns," according to its website.
Prioritizing good record keeping is crucial. Though it depends on your personal factors, it's best to keep your cryptocurrency transaction history for at least three years, says Shehan Chandrasekera, certified public accountant and head of tax strategy at cryptocurrency portfolio tracker and tax calculator CoinTracker.
2. Start tracking
Going forward, you may also want to use a reputable cryptocurrency and portfolio management software tool which tracks transactions, calculates gains and losses and stores proof.
This is a way investors can "accurately build their tax profile and prove to the IRS their actual tax liability," Chandrasekera previously told CNBC Make It.
Additionally, it may be helpful to work with a CPA who can help guide you through the reporting process and help you plan for the future, especially with the growing possibility of more cryptocurrency regulation.
3. Be aware of upcoming regulation
Throughout the past year, there's been a heightened focus on cryptocurrency regulation. Though it's impossible to predict what will be instated, it's good to be aware of what's being discussed by lawmakers.
In the Build Back Better Act, policymakers propose imposing "wash sale" rules on commodities, currencies and digital assets in 2022. If passed, this would prevent cryptocurrency investors from immediately buying back the same asset after selling at a loss.
And the bipartisan infrastructure bill signed into law in November includes tax reporting provisions that apply to digital assets like cryptocurrency and nonfungible tokens, or NFTs, and will require cryptocurrency brokers to report cryptocurrency gains in a type of 1099 form.
However, the provisions will not take effect until January 2024, and in the meantime, lobbyists within the cryptocurrency industry plan to push for amendments and standalone bills to adjust them.
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