How are Bitcoin and Other Cryptocurrencies Taxed
May 13, 2022
Cryptocurrency has taken the world by storm.
What began as a fringe movement in 2009 has evolved into a fixture of the global economy. Every year, more and more Americans trade Bitcoin, Ethereum, and other popular altcoins.
The facts are in: cryptocurrency is here to stay, and the Internal Revenue Service (IRS) isn’t messing around.
As you’ll see on the 1040 U.S. Individual Income Tax Return form, the IRS bluntly asks,
“At any time during 2021, did you receive, sell, exchange or otherwise dispose of any
financial interest in any virtual currency?”
When it comes to tax laws, crypto transactions are treated as property, not as currency.
In other words, they’re liable to the same capital gains taxes as stocks.
If you sold, traded, or were paid in crypto in 2021, you will likely need to pay taxes on it.
However, if you bought crypto with U.S. dollars and held it, that is not considered a tax liability, and you can answer “no” to the aforementioned IRS Form 1040 question.
Crypto Tax Liabilities
Cryptocurrencies can be complex, and so are their accompanying tax laws.
While it’s always smart to check with a tax professional before filing, these are the eight general situations in which you’ll need to pay taxes on crypto holdings:
- +If you sold your cryptocurrency for government-backed currency and made a profit, you may be liable to pay capital gains taxes
- +If you converted or traded one crypto for another, you may be liable to pay capital gains tax if the initial crypto was sold for a profit
- +If you bought or sold a non-fungible token (NFT) in the digital marketplace, you will pay capital gains taxes
- +If you acquired crypto from mining, the profit is generally considered taxable income
- +If you acquired crypto from an airdrop or hard fork, the proceeds are generally considered taxable income
- +If you were compensated in cryptocurrency, that is also considered taxable income
- +If you paid anyone with cryptocurrency, you’ll need to report employee earnings on a W-2
- +If you used your crypto to purchase a good or service, the IRS interprets such a transaction as essentially
selling crypto for cash. As such, you will pay taxes.
Where there’s profit, there’s taxation — even with cryptocurrency.
Calculating What You Owe
The amount of taxes owed depends on three variables: your annual income, your tax filing status, and the length of time you owned a crypto prior to its sale.
If you owned a cryptocurrency for longer than 365 days before selling, your proceeds would fall under the long-term capital gains tax rate (just like a stock).
According to the IRS, the long-term capital gains tax rates are divided into three groups:
- +If your taxable income is $40,400 or less (or under $80,800 if married filing jointly), your net capital gain tax rate will be 0%.
- +Single filers with taxable income between $40,400 and $445,850 — or between $80,801 and $501,600 if married filing jointly — will face a capital gain tax rate of 15%.
- +Amounts in excess of $445,800 (or $501,600 if married filing jointly), will be assessed a capital gain tax rate of 20%.
Conversely, if you owned a cryptocurrency for less than 365 days before selling it, your gains will simply be taxed as ordinary income.
To review the income tax brackets for 2021, click here.
How to Report Crypto Taxes
The reporting process can be complicated, as you’re solely responsible for tracking your taxable activities throughout the year.
While cryptocurrency exchanges can provide 1099-B forms — i.e. the summaries of your capital gains and losses— they’re not legally required to do so until tax year 2023.
In other words, you’ll likely need to manually track your crypto paper trail and prove what you bought, when you bought it, and how much it cost.
You should also be able to demonstrate the same information if you sold crypto (and for how much).
As you prepare to file taxes, there are two forms you can expect to use:
- +Form 8949, where you’ll list and calculate your individual crypto transactions
- +Schedule D, where you’ll report the total value of your 2021 capital gains and losses
Note: Did you transact more than $20,000 in payments and over 200 transactions last year?
If so, you may receive a Form 1099-K from your crypto exchange(s).
Writing Off Crypto Losses
Any losses incurred from selling crypto can be used to offset your capital gains.
This popular feature is known as “tax-loss harvesting.”
For example, let’s say your shares in “Altcoin A” earned $3,000 in income, while your shares in “Altcoin B” resulted in a loss of $2,000.
In this case, you would simply subtract your losses from your gains and reduce your total taxable profit to $1,000.
The IRS permits you to deduct up to $3,000 against your non-investment income.
We’ll take all the breaks we can get, right?
Taxes have always been complex.
With the emergence of cryptocurrency, they’re not getting any easier.
While it may be tempting to ignore your crypto taxes for the time being, don’t risk it. The IRS won’t hesitate to assess interest, penalties, and even criminal charges for tax avoidance — no matter the size.
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Flyp does not provide tax advice. This material has been prepared for informational purposes only, it is not intended to provide, and should not be relied on for tax advice. You should consult your tax advisors before engaging in any transaction.
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Dore, Kate, “‘You’re playing with fire if you don’t report it.’ What happens if you don’t disclose crypto activity this tax season,” CNBC. CNBC, January 25, 2022, “https://www.cnbc.com/2022/01/25/what-happens-if-you-dont-disclose-crypto-activity-this-tax-season.html