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With less than nine weeks to go until, cryptocurrency investors and enthusiasts are discovering that filing their taxes may be a bit more complicated this year.
The IRS is asking everyone filing a return this year about their cryptocurrency activity -- and that may be the first time that many people consider the tax implications of buying, selling and trading crypto. In a nutshell: The IRS treats virtual currencies, likeand -- and even -- differently from other assets and investments. There are specific rules you'll need to follow if you sold or traded those assets last year. But can make it way easier to report all of your crypto activity correctly.
"The average investor needs to understand that cryptocurrency is not like any other type of currency out there. Cryptocurrency is treated as property for tax purposes," says Shaun Hunley, a tax consultant at Thomson Reuters. "So anytime you're going to use cryptocurrency or transact in cryptocurrency, you're going to have the potential for gain or loss on [your] tax return."
There's an important caveat, however. If you used fiat currency -- that is, US dollars -- to buy crypto assets in 2021, you don't have to report anything about it on your return. (For now, at least. This is, and US law in general.)
Nonetheless, if you sold crypto, you'll need to report that on your return. And if you traded one cryptocurrency for another, that's going to need to be reported, too. Reporting gains and losses is fairly straightforward once you know the ropes, and there are tools to help you if you're not inclined to take on the math and accounting yourself. Read on to learn everything you need to know about handling cryptocurrency on your state and federal tax returns this year.
Note: The following is about US taxes and applies to US citizens and resident aliens. If you made money from cryptocurrencies in foreign countries, you may also have to pay taxes there.
How is the IRS handling cryptocurrency on 2021 taxes?
As it has been doing since 2019, the IRS will ask about your cryptocurrency for your taxes. This year the 1040 US Individual Income Tax Return form (PDF) features a question about crypto: "At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?" And though the IRS there is asking about receiving cryptocurrency as well, it's actually pretty focused on whether you unloaded it by selling or trading it.
"If you're just purchasing cryptocurrency with US dollars, and that's all you do during the year -- you don't sell it, you don't exchange it, you just keep it in your wallet for the whole year -- you can check 'no' on that question," says Hunley.
The IRS updated the FAQ page on digital currencies to underline this point, in the answer to a question about 2020 taxes: "If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question."
For now, the IRS regards bitcoin and other cryptocurrencies like property. So, if you bought bitcoin and held it all, you don't need to report that on your tax return.
"The bottom line is that the IRS is looking for taxable transactions. So if you have a taxable transaction, you should be checking 'yes.' If you have a nontaxable transaction, you're checking 'no,'" said Hunley.
So, if I just bought bitcoin (or another cryptocurrency) on Coinbase, for example, I don't need to report it?
Correct. If you used US dollars to buy crypto on an exchange, or through a private transaction, there's no need to report it.
OK, I sold some bitcoin. Do I need to report that on my taxes?
Yes. Once you sell, and "realize" a gain or loss, you need to report it -- and pay taxes on any capital gains.
What are capital gains and losses?
In short, they're the difference between how much an asset cost when you bought it and when you sold it. If the price went up, it's a capital gain. If it went down, it's a capital loss. The IRS has published a longer and much more detailed explanation.
The other thing to know about capital gains is that the IRS categorizes them as short-term or long-term. Generally, the proceeds associated with assets you held for more than 365 days would be classified as long-term capital gains, which are typically taxed at 15%. Any assets held for a shorter time are short-term gains, and taxed like ordinary income -- at rates that can go as high as 37%.
This works both ways. If you lost money on your crypto-shenanigans last year, you can now deduct those losses on your return. (The IRS limits capital loss deductions at $3,000 per year, or $1,500 if married and filing separately.)
How do I calculate cryptocurrency capital gains and losses?
For each trade, partial or complete, you'll need to know the following details:
1. When you bought the coins.
2. How much you paid for them (in US dollars).
3. When you sold the coins.
4. How much you received for them.
The more sophisticated exchanges may have a reporting mechanism to help you collect this kind of information. Otherwise, unless you've kept detailed records of your own, you may need to root through your email, bank account or wallet receipts.
Once you have that information in hand, there are several options available for doing the math. For example, some investors use the "first in, first out" (or FIFO) methodology, wherein the first coins you buy (at what price they cost) are also the first coins you sell. We won't cover all of the methods and math here. You can do a web search to learn more about the options for calculating capital gains.
I traded bitcoin (or another coin) for some ether or dogecoin. Do I need to report it on my taxes?
Yes. Trading one cryptocurrency for another constitutes a taxable event.
Which tax form do I use to report cryptocurrencies?
It all goes down on Schedule D, the federal tax form used to report capital gains.
I paid people using bitcoin. Do I need to file?
Yes, you'll need to report employee earnings to the IRS on a W-2. And if you compensated contractors with crypto, you'll need to issue them a 1099.
I sold bitcoin worth $100 last year. Do I need to worry about all of this?
Yes. If you sold bitcoin for a gain, it qualifies as a taxable event. Though the IRS typically dedicates its investigative resources to auditing bigger fish, the outfit is allocating more resources to crypto forensics, and you're better off playing it safe.
I received $10,000 or more worth of bitcoin in one transaction last year. Do I need to fill out an extra form?
Yes. Section 6050I of the Internal Revenue Code was recently amended as a part of the infrastructure bill. If you received at least a $10,000 value in bitcoin or other digital assets in a single transaction, or in related transactions, then you must report it using an 8300 form (PDF) within 15 days. Failure to report transactions of this kind can result in felony charges.
Will I receive any tax forms for the crypto exchange or marketplace I use?
Some exchanges may send a Form 1099-K to customers who meet certain thresholds of volume or value. Coinbase customers who received rewards and/or fees of $600 or more through Coinbase, Coinbase Pro and Coinbase Prime will get a 1099-MISC form. And for this year's tax season, Coinbase has also created a tax center with information to help Coinbase users navigate their taxes.
Is there software to help me sort this out?
Yes. TurboTax, H&R Block and some other onlinewill lead you through the filing process for these kinds of transactions. If your platform of choice doesn't support crypto, you should be able to use whatever system it has in place for reporting capital gains or losses related to stocks as a substitute.
There are also specialized tools available, like CoinTracker, that offer dedicated support for cryptocurrency tax reporting -- including more complex scenarios for frequent traders or people holding multiple wallets. CoinTracker has also partnered with OpenSea, an NFT marketplace, to help people who own NFTs figure out taxes. (Note: We have not yet tested CoinTracker and are still assessing the crypto reporting capabilities of the major tax platforms.)
Who can help me figure out my bitcoin taxes?
If you're looking for more guidance, we urge you to consult a tax professional. The basic tax code is notoriously complex, and crypto activity can get awfully complicated quickly. When in doubt, hire a pro.
"I always tell people to inform your tax return preparer early on that you invest in cryptocurrency. Tell them during the year that you have crypto and you're going to transact in crypto," said Hunley. "And if you're going to invest in cryptocurrency, if you can hold it for more than one year, you need to do that. Then you get a lower tax rate, and you want to take advantage of that."
And, as with everything cryptocurrency-related: Do your research, pay your taxes and caveat emptor.