Filing taxes can be complicated, and it can be even more so for anyone who has purchased cryptocurrency. Regardless, it’s essential to understand your responsibilities as a tax filer. What taxable events should you know about? What about claiming deductions?
The answers to these questions largely depend on where you live in the United States.
This guide covers the basics of the U.S. crypto taxation policy for the 2021 tax year. If you’re a citizen of another country or region, please disregard the information in this article and take time to research the laws that are specific to your tax jurisdiction.
This guide isn’t official tax advice. Always be sure to consult a tax professional and be aware of any tax policy updates before filing.
Crypto Question on U.S. Tax Return
In the 2020 tax year, the U.S. Internal Revenue Service (IRS) included a new question to Form 1040.
When filing in 2022, U.S. tax filers will see this question: “At any time during 2021, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
Note that “virtual currency” is a synonym for cryptocurrency.
To report crypto taxes, U.S. tax filers need to respond “yes.” Tax software will then provide a list of possible crypto-related income streams.
Common Taxable Events
Let’s examine a few common scenarios where U.S. tax filers are required to file taxes on crypto activity.
Selling Crypto for Captial Gains
Broadly speaking, if the tax filer bought $100 worth of Bitcoin (BTC) and sold it for $500, that person would see a capital gain of $400. Conversely, if the tax filer’s Bitcoin lost value in that time, that person would face a capital loss that could be deducted on a tax return. the tax filer would need to report their capital gains on Form 1040 Schedule D.
It’s crucial to understand that the U.S. uses the First In, First Out (FIFO) accounting method for capital gains taxes. So let’s say the tax filer bought 0.1 BTC for $4,000 and then another 0.1 BTC for $5,000.
If the tax filer later sold 0.1 BTC for $4,500, they would owe $500 in capital gains. This is because the 0.1 BTC is from the first purchase rather than the second purchase. However, if the tax filer sold all 0.2 BTC for $4,500 the tax filer wouldn’t have any capital gains.
Capital gains tax also applies when someone sells one crypto for another crypto. Let’s say the tax filer bought $100 worth of Bitcoin (BTC) and exchanged it for $100 worth of Ethereum (ETH). If they originally paid $50 for Bitcoin, this will equal a capital gain of $50 when exchanging BTC for ETH.
Receiving Crypto as Income
If the tax filer received crypto as income, they’ll need to report the amount based on the fair market value on the day they received it.
Let’s say the tax filer received $1000 worth of Bitcoin in January. Regardless of whether the price goes up 20% or down 20% (or any other percentage), the taxed amount is based on the price when funds arrive in their cryptocurrency wallet.
Earning Interest on Crypto Holdings
If the tax filer holds crypto in a crypto interest account, interest earnings will be treated as income. In most cases, the crypto platform will send a Form 1099-MISC if that person earned $600 or more of interest.
Crypto Mining Rewards
Tech-savvy cryptocurrency users set up mining rigs to earn Bitcoin (BTC), Litecoin (LTC), and other Proof-of-Work coins. Earnings from crypto mining need to be reported in Form 1099-NEC. Calculated earnings are based on the fair market value of the cryptocurrency on the day received.
Common Non-Taxable Events and Deductions
What About Holding Crypto?
As of March 2022, there is no tax on unrealized crypto gains. Let’s say the tax filer bought $1,000 worth of Bitcoin and the price doubles.
If the tax filer now has $2,000 worth of Bitcoin, they don’t have to pay any extra taxes just for HODLing Bitcoin in a crypto wallet. the tax filer only needs to pay capital gains taxes if they sell that Bitcoin for another cryptocurrency or fiat currency or if completing a purchase with that Bitcoin.
Counting Capital Losses
The IRS limits maximum net capital loss in any tax year to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately). Just like capital gains, tax filers can report capital losses using Form 1040 Schedule D.
What happens if the tax filer has a capital loss of $5,000? the tax filer is allowed to deduct $3,000 in the current tax year. The remaining $2,000 can be carried forward to the next tax year. In fact, the tax filer can carry over losses indefinitely. However, any capital gains earned in subsequent years will reduce aggregate total capital loss.
Remember that capital gains and losses are based on the aggregate across all crypto activity as well as other assets (i.e. stocks and bonds). Let’s say the tax filer loses $1000 via stock trading but gain $1500 via crypto trading. That person will then owe taxes on the difference, which is a net positive of $500.
The IRS treats crypto donations much like it treats fiat currency donations.
If the amount is less than $15,000, the recipient won’t owe capital gains tax unless they sell the gift (i.e. exchange it for another crypto or sell it for fiat). The donor can deduct the gift amount on their tax return.
If the value exceeds $15,000, the donor needs to file Form 709.
Calculating Crypto Taxes and Filling Out Forms
Note that other types of crypto capital gains (i.e. selling an NFT) or crypto deductions (i.e. gas fees for blockchain transactions) may exist.
Due to the rising popularity of crypto, more and more tax software applications provide helpful guidance on filing crypto taxes.
Especially during tax season, it’s crucial to be vigilant about personal information security. Scammers commonly use phishing emails to steal social security number (SNN) or crypto funds.
Don’t fall for phishing scams! It’s best practice to visit the crypto platforms directly to find the necessary tax forms.
Hopefully, this guide provides the basics of what is important to know about crypto taxes.
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