2021 was a big year for crypto and the crypto holders who invest in its currency. According to a study by Grayscale Investments, more than half of current Bitcoin investors started less than 12 months ago. Many of them have applied grid trading bot or other bots to get the best return. The IRS considered 2020 and 2021 pretty exciting, too, especially from a tax perspective.
When to Report Cryptocurrency on Your Tax Return
Whether you buy or sell cryptocurrency, you’ll likely have to report it on your tax return. You can use tax form generator sites, like FormPros, to make the documents you need for the IRS.
Purchasing Crypto With Regulated Money
In 2021 United States citizens who only purchased cryptocurrency with U.S. dollars and didn’t trade or transfer crypto back into their personal wallet do not have to file a report. According to Form 1040, anything that sits in your crypto wallet isn’t taxable, but that may change.
Trading and/or Selling Cryptocurrency
The IRS counts cryptocurrency as “taxable” the moment you sell crypto for the U.S. dollar, trade one cryptocurrency for another, or buy goods or services with crypto. Every time you place a trade, the IRS considers it a “taxable event,” so you’ll need to track every trade you make.
When You’ll Owe Taxes to the IRS
The IRS considers all virtual currencies as property, like real estate and stocks, meaning their taxable value is based on capital gains and losses. For the 2022 tax season, the IRS will take the amount you spend on cryptocurrency and add or subtract based on your profits or losses.
For example, if you bought cryptocurrency for $4000, lost $2000 on a trade, but then gained back $4000, you would pay capital gains tax on the $4000 you earned as a profit.
Just like real estate and stocks, the amount of time you owned the cryptocurrency plays a part in your tax burden. If you bought and sold your cryptocurrency in under a year, that’s a short-term capital gain. A long-term gain is any property asset you hold for over a year.
The short-term capital gains tax is often much more expensive at 10%-37%. Long-term capital gains tax ranges from 0%-20%. It’s ideal to hold on to crypto long-term for tax filing.
How to Report Crypto Income
Self-employed individuals who want to pay themselves using cryptocurrency will need to report their earnings as self-employed income. You’ll have to use the 1099-NEC (for dollar amounts) plus the 1040 (for crypto amounts) if you made over $600 in cryptocurrency in 2021.
If you received virtual currency as payment for services and you’re considered an employee by your employer, you’ll continue to use the W-2 for your dollar amount income, if applicable, plus the 1040 for cryptocurrency. If you received payment as a freelancer, you’re self-employed.
Regardless, cryptocurrency is considered personal income, even if you own a business.
To report the numbered value for cryptocurrency, you need to use the “fair market value.” You’re responsible for tracking a currency’s fair market value at the time of purchase.
How to Track Your Crypto Income
When you start dealing with cryptocurrency, you need to track every time you receive, sell, or exchange crypto. Actually tracking cryptocurrency is difficult. After all, the blockchain itself is notoriously difficult to keep tabs on, so you’ll have to create your own tax ledger.
While some cryptocurrency exchanges will give you a tax form, there’s no guarantee they’ll give you the right form or declare the accurate amount. Keep in mind that reporting cryptocurrency for tax purposes is still a new concept for exchanges, so they’ll need some time to get it right.
Crypto-focused tax software, like TokenTax and CoinTracker, can help you input information across all exchanges you’ve used, but you have to update the data yourself.