Ultimate Guide to Cryptocurrency Tax.
How to Prepare Tax on Crypto?
Did you know that, for the IRS’s purposes, crypto tax is based on the fact that they consider cryptocurrency to be property?
One of the first questions on Form 1040 (the main U.S. Individual Income Tax Return form) is a yes or no question. At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency? A version of this question first appeared on Form 1040 in 2020 and is there this year too.
According to the cryptocurrency exchange platform Coinbase, more than 10 percent of Americans traded cryptocurrencies in 2021. And cryptocurrencies are only growing more popular. Are you one of the many Americans holding, trading, and/or mining crypto? If so, it’s essential this tax season to be on top of what the IRS’s regulations for crypto tax means for your situation.
So, Crypto is Considered Property?
When thinking about crypto tax requirements, there are “taxable events” that the IRS will be interested in related to crypto transactions.
The IRS states that “Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.” What does that mean for us, individual taxpayers?
Certain activities related to holding and trading crypto will make you liable for capital gains taxes from certain activities:
- selling crypto for cash
- exchanging/trading one cryptocurrency for another
- making purchases with crypto
It also means that activities like buying crypto or transferring assets between exchanges (on a like-for-like basis) are non-taxable events. You will only incur tax on crypto and make transactions that are taxable events when you have realized gains or losses from selling crypto. Whether that is for cash, to buy a new crypto, or purchase goods and services.
What does it mean practically for cryptocurrency tax obligations.
Capital gains taxes on assets will differ depending on how long you’ve held your cryptocurrency before selling. Similar to income taxes, capital gains taxes are also progressive. The tax rate increase as the taxable amount increases. Additionally, there are different rates for long-term gains versus short-term gains. Long-term gains will be taxed at a reduced rate compared with short-term gains, and these rates will vary depending on your income.
Depending on your income level, you can also be liable for the Net Investment Income Tax, which is set at 3.8 percent. In addition to crypto, net investment income also includes things like other forms of capital gains, interest, dividends, and rental and royalty income.
There are also instances when cryptocurrency that you receive will need to be reported as income. Taxable events that fall under this category include activities such as:
- being paid in cryptocurrency
- both staking and mining cryptocurrency
- airdrops from hard forks
Both gifting and donating cryptocurrency are treated like other gifting and donating activities for tax purposes.
Remember to keep track of crypto transactions across any exchanges you use both for filing purposes. Especially for reporting capital losses that can be deductible. It is subject of course to the limitations on the deductibility of capital losses.
What IRS forms should I know about when paying tax on crypto?
Form 1040, the U.S. Individual Income Tax Return
Form 1040, the U.S. Individual Income Tax Return, will ask you about receiving, selling, exchanging, or disposing of crypto in the form of a yes or no question.
Form 8949, Sales and Other Dispositions of Capital Assets
You’ll use Form 8949, Sales and Other Dispositions of Capital Assets. This is to list your capital gain and loss transactions (crypto tax events taxable as property).
Schedule D (Form 1040), Capital Gains and Losses
You’ll use Schedule D (Form 1040), Capital Gains and Losses to aggregate and calculate your gains or losses based on the information from From 8949.
Schedule 1 (Form 1040), Additional Income and Adjustments to Income
You’ll use Schedule 1 (Form 1040), Additional Income and Adjustments to Income to report income from activities like staking or mining (crypto tax events taxable as income).
File your crypto tax with PriorTax.com. We answer question prompts that will ensure you accurately report your capital gains and losses and other forms of income related to your crypto activities. If you receive a Form 1099-MISC from any exchange platforms, they will be helpful in ensuring you are correctly fulling your crypto tax obligations.
Additional records like gain/loss reports as well as raw transaction reports can also be really vital here to calculate your gains and losses for accurate reporting.
Crypto Tax Calculator
I want to estimate how much I’ll get back when I file my taxes. How do I factor in cryptocurrency tax obligations when using the 2021 Tax Calculator?
Take all of your transactions at each of your exchanges as your starting point. If not already calculated for you, you’ll need to calculate your capital gains and losses.
Then, in the “Investments” tab, under “Income,” you’ll use this information to fill in fields for Capital Gains or Losses. There are separate fields for short-term and long-term capital gains and losses. In the “Other” tab, also under “Income,” you can record crypto taxable events that are treated as income. Events such as staking, mining, airdrops, being paid in crypto in the field for Other Income.
Have questions about crypto tax obligations and regulations?
In addition to certified tax professionals like those at PriorTax.com, the IRS’s own website can be an excellent source of information for all things related to crypto taxes. The IRS maintains an FAQ on Virtual Currency Transactions that will cover many of the activities. They are part and parcel of using crypto or “Virtual Currency,”. You’ll find them referred to on their websites.
The IRS has also published guidance regarding tax on transactions using crypto. This is also available on the IRS’s website in the bulletin IRS Notice 2014-21, IRB 2014-16.
Keep up to date with PriorTax.com’s Tax News Blog. On the blog, we share helpful information on topics like tax obligations on crypto and more to make sure you have everything at your fingertips to tackle your taxes with confidence. And when you’re ready to file your current year or any prior-year tax return, we’re here to help you through the process. We can help you avoid racking up any more penalties and claim the fullest tax refund you are eligible for.
