If you invested in crypto last year, you may be in for a rude awakening this tax season.
Yes, your Bitcoin, Ethereum, and other cryptocurrencies are taxable. The IRS considers cryptocurrency holdings to be “property” for tax purposes, which means your virtual currency is taxed in the same way as any other assets you own, like stocks or gold.
April 18 was the last day to file your 2021 taxes or request an extension to file. If you requested an extension, you’ll have until Oct. 17, 2022, to file.
2021 was a big year for crypto, with many new investors buying in for the first time. More than half of current Bitcoin investors began investing in the last 12 months, according to a recent study by Grayscale Investments. The crypto market hit multiple all-time highs and lows throughout the year, leading to large gains and losses for many investors.
“Crypto did some exciting things in 2021, and then there’s a lot of people that have gotten into crypto in the last 12 to 24 months, so it might be their first time paying crypto taxes,” says Laura Walter, a certified public accountant and founder of Crypto Tax Girl.
For most people who buy and trade crypto within online exchanges, accounting for it in your tax return is relatively easy. But like most things related to digital currency, things can get a lot more complicated the more active you are.
Here’s what you need to know about which activity you might need to report to the IRS, and how you can begin planning ahead for your 2021 taxes.
When to Report Cryptocurrency Trades on Your Tax Return
Purchasing Crypto With Dollars
Simply buying virtual currency with U.S. dollars and keeping it within the exchange where you made the purchase or transferring it to your personal wallet does not mean you’ll owe taxes on it at the end of the year.
If your only crypto-related activity this year was purchasing a virtual currency with U.S. dollars, you don’t have to report that to the IRS, based on guidance listed on your Form 1040 tax return.
Things start becoming taxable when you use crypto as a method of exchange. This includes selling your crypto for U.S. dollars, exchanging one cryptocurrency for another — buying Ethereum with Bitcoin, for example — or paying for goods and services with crypto.
“Whenever you sell the investment, or exchange the investment for another investment, that is when a taxable transaction happens,” says Daniel Johnson, a financial advisor and founder of RE|Focus Financial Planning in Asheville, North Carolina. “You’ve got to be careful if you’re doing a lot of trading. If you’re going in and out of different types of cryptocurrency, every single time you place that trade, it is a taxable event.”
The IRS is taking a harder look at cryptocurrency transactions this year and cracking down on anyone dodging taxes, says Walter. If you’ve avoided reporting your crypto on your taxes in the past, this year “might not be the year you’ll get away with it,” she says.
“I’m expecting more audits now that the IRS is requiring more tax forms and reporting,” says Walter.
Trading or Minting NFTs
A non-fungible token, or NFT, is a token created on a blockchain that proves you are the only owner of that one-of-a-kind digital item, whether it’s a digital sports collectible or an animated flying cat with a Pop-Tart body. You can buy and sell NFTs in digital marketplaces like OpenSea and SuperRare.
And like crypto, they are taxed.
But because the IRS has not released any specific tax guidance on NFTs, it can be a little confusing to navigate. According to Shehan Chandrasekera, CPA and head of tax strategy at CoinTracker.io, a crypto tax software company, the specific tax implications of a given NFT depends on two things: whether you’re an NFT creator or investor and to what extent you’re interacting with NFTs (i.e. as a hobby or a business).
If you’re creating, or minting, NFTs, it’s important to know what events are taxable and how they’re taxed. For example, paying gas fees to mint an NFT is a taxable event. Say you make NFTs for fun and spend 0.1 Ethereum to mint an NFT. If you originally purchased this Ethereum for $100, and it’s worth $300 at the time you minted the NFT, then the transaction would generate a $200 capital gain for you. You would be subject to either a long-term or short-term capital gains tax rate, depending on how long you held the Ethereum before using it to mint the NFT. However, if you were a professional creator who frequently minted NFTs for your business, the $100 would be treated as ordinary income.
“If you’re a hobbyist, you report income but you cannot deduct any business-related expenses,” says Chandrasekera. “If you’re creating NFTs as a business, then you can deduct business-related expenses.”
Once you sell that NFT for crypto or exchange it for another NFT, that triggers another taxable event. It would be taxed as income since you’re earning (or losing) money for selling the NFT you created. Any royalties you earn for an NFT you created would also be taxed as income.
For NFT investors, taxes work similarly to the way they work for crypto trading. Most art-based NFTs are classified as collectibles for tax purposes, which subjects them to capital gain taxes like other common cryptocurrencies. Any time you purchase an NFT using a cryptocurrency like Ethereum or sell an NFT, you’ll be subject to capital gain taxes. The amount you’ll owe will depend on how long you held the NFT and whether you made a profit. You can also claim losses on NFTs in your taxes, according to Chandrasekera.
“If the value of your Ethereum has gone down at the time you’re buying an NFT, that triggers a loss that you can claim,” he says.
|Examples of Taxable Crypto Events||Examples of Non-Taxable Crypto Events|
|Selling cryptocurrency for fiat money (USD, EUR, JPY, etc.)||Buying cryptocurrency with fiat currency|
|Trading cryptocurrency for other cryptocurrency (for example, trading Bitcoin for Ethereum)||Donating cryptocurrency to a tax-exempt organization|
|Using cryptocurrency to buy a good or service||Gifting cryptocurrency to anyone (if the gift is no more than $15,000)|
|Buying, selling, or trading an NFT||Transferring cryptocurrency from one wallet that you own to another wallet that you own|
|Buying an NFT with fiat currency|
When You’ll Owe Taxes on Cryptocurrency
Because the IRS considers virtual currencies property, their taxable value is based on capital gains or losses — basically, how much value your holdings gained or lost in a given period.
“When you trade cryptocurrencies or when you spend cryptocurrency to buy something, those transactions are subject to capital gains taxes, because you’re spending a capital asset to get something or get another asset,” says Chandrasekera.
The difference between the amount you spent when you bought or received the crypto (its cost basis) and the amount you earn for its sale is the capital gain or capital loss — what you’ll report on your tax return. Broadly speaking, if you bought $100 worth of Bitcoin and sold it for $500, you’d see a capital gain of $400. If your Bitcoin lost value in that time, you’d instead face a capital loss. If your losses exceed your gains, you can deduct up to $3,000 from your taxable income (for individual filers).
The amount of time you owned the crypto plays a part, too. If you held onto a unit of Bitcoin for more than a year, it would generally qualify as a long-term capital gain. But if you bought and sold it within a year, it’s a short-term gain. These differences can affect which tax rate is applied. The tax rate also varies based on your overall taxable income, and there are limits to how much you may deduct in capital losses if your crypto asset loses value.
2022 Tax Rates for Long-Term Capital Gains
|Single||Up to $41,675||$41,676 to to $459,750||Over $459,750|
|Head of household||Up to $55,800||$55,801 to $488,500||Over $488,500|
|Married filing jointly||Up to $83,350||$83,351 to $517,200||Over $517,200|
|Married filing separately||Up to $41,675||$41,676 to $258,600||Over $258,600|
Short-term capital gains are taxed as ordinary income, according to 2022 federal income tax brackets.
You can use Form 8949 to reconcile your capital gains and losses, and then report them on your Form 1040 tax return using Schedule D. If you’re an NFT investor or hobbyist, you can use the same form to report NFT minting gains or losses and NFT trades. Just make sure to enter code “C” in column (f) to show that you sold an NFT, which is treated as a collectible. The IRS’ website has additional information and tools to help you determine your crypto-related tax liability and how to report it on its website.
Reporting Crypto Income
Some people receive virtual currency as payment for services. This might mean receiving crypto as income instead of cash, earning Bitcoin by mining new coins, or receiving coins or tokens as reward for certain activities (Coinbase’s Earn rewards program, for example). Regardless of how it’s earned, you’ll need to record the value of the crypto in U.S. dollars when it’s received and report that income on your tax return.
“If I get paid one Bitcoin for services, I have to grab the fair market value for that Bitcoin at the moment I receive it,” says Pat White, co-founder and CEO of Bitwave, a company that helps businesses with crypto tax reporting. “Right now, if Bitcoin is at $54,000, I have to record $54,000 of revenue as personal income.”
The IRS puts it this way: “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”
That fair market value you capture sticks to that coin as the cost basis, which is your responsibility to track. So if you go and buy something with crypto you’ve earned, you’ll need to reconcile its cost basis with its value when you use it for goods or services.
This IRS webpage has additional information on reporting virtual currency income in more specific cases.
Track Your Activity
One of the most important things to remember as you start dealing in cryptocurrency is that it’s your responsibility to keep track of all your potentially taxable activities, as well as the fair market value of your crypto throughout those activities.
The IRS offers only general guidance about the records you’ll need to keep for tax reporting purposes: they should be sufficient “to establish the positions taken on tax returns.” Some examples the agency gives include records of any time you receive, sell, or exchange virtual currency, as well as the fair market value of your virtual currency.
“That is the big, scary thing,” White says. Getting into the crypto space can be incredibly simple, “but actually tracking the cost basis and making sure you’re doing it correctly, that’s where it gets really tricky.”
Some exchanges may issue a Form 1099-B to help you determine gains and losses, but that’s uncommon. Ultimately, you’re responsible for tracking your taxable activities and your currency’s fair market value.
Looking ahead, that won’t be the case for the 2023 tax year. A section of the $1.2 trillion bipartisan infrastructure bill, signed into law by President Biden last November, requires brokers — aka cryptocurrency exchanges — to issue a 1099-B. In other words, crypto exchanges will be required to notify the IRS directly of crypto transactions.
“Do not expect cryptocurrency exchanges to give you a tax form this year,” says Shehan. “The bill for the 1099-B forms applies to the 2023 tax year. For 2021 and 2022 tax years, you’re not going to get a 1099-B.”
If you leave your virtual currency within your account on the exchange you buy it, it’s generally easy to track or generate reports about your transactions. But if you move your currency between private wallets or you have crypto in multiple places, you’ll need to be more diligent in your tracking.
There are crypto-focused tax software programs you can use to simplify the process. As long as you input data on all your crypto trades or earnings across all exchanges you’ve used, the software will generate the cost basis for your trades and help you determine your capital gains and losses. Some of these programs — CoinTracker, TokenTax, CryptoTrader.Tax, and more — are compatible with regular tax programs like TurboTax or TaxAct, so you can easily import the gains and losses they report to your tax return.
How to Prepare for Tax Season When You Have Crypto
The best thing you can do to simplify your crypto-related 2021 tax filing is start planning ahead now. Don’t wait until April 1, 2022, to begin gathering your reports and figuring out what you owe, even if that’s how you typically approach tax season.
“You do not want to be in the situation in April where you’re trying to catch up with one year’s worth of crypto activity,” White says. “You really want to treat it more like a business, where on a monthly basis you are making sure that all of your taxes are up to date, making sure you are tracking things correctly, and being more proactive about it.”
If you’re just dipping your toes into trading Bitcoin or another cryptocurrency, and only have a few transactions (with accurate cost basis reporting), you may be able to easily report your crypto earnings yourself using your typical tax software.
“Most people are pretty simple: they have a W-2, they have a couple 1099 interest forms, and they may have some crypto,” Chandrasekera says. “So those people don’t really need a CPA. But if you’re somebody dealing with large amounts of money, you’re making DeFi transactions, staking or mining operations, those people will want to have a CPA to sit down and do tax planning and tax-saving strategies.”
Consider Working With a Professional
Even if you aren’t conducting complex crypto activities, and just have questions about your specific tax obligation or you’re unsure if you’re reporting correctly, consider working with a tax professional who has experience interpreting tax code related to virtual currencies.
The IRS and other regulators cannot issue guidance on every situation a taxpayer may run into, and there are plenty of gaps in current guidance. That’s why it’s important to look for a tax professional who is familiar with current IRS guidance and has experience reporting cryptocurrency gains and losses, Chandrasekera says. Ask potential tax pros if they own any virtual currency themselves, and make sure they acknowledge the uncertainties in the tax code.
“There are some gray areas, and that’s where CPAs need to come in and say, ‘OK, we don’t have direct guidance from the IRS, but when they set up the guidance, this was the intention,’” Chandrasekera says. “As CPAs, we should be able to use our experience and our overall knowledge about the tax code and apply those rules to the unique cases that we see.”
IRS Guidance for Virtual Currencies
Here’s the guidance the IRS has issued so far related to virtual currencies and tax reporting:
- Virtual currencies
- Frequently asked questions on virtual currency transactions
- IRS Notice 2014-21: How existing tax principles apply to virtual currency transactions