Taxation of Cryptocurrency
Cryptocurrency has exploded onto the scene in recent years and if you’re one of the millions of Americans who own cryptocurrency, there are key questions you need to consider this tax season.
Cryptocurrencies are taxed as property in the eyes of the IRS. Investors must pay capital gains taxes based on the difference between the sales price and the cost basis of the coin, similar to owning an individual stock such as Apple or Google. In addition, interest income from staking, as well as mining and airdrops are all subject to ordinary income rates.
Crypto owners should receive the following tax reports (or a combination of) before January 31st, 2022:
- 1099-B: Summarizes capital gains and losses which will include dates, purchase price, sales price and the resulting gain or loss.
- 1099-K: If you incurred more than 200 transactions or $20,000.00 in gross proceeds, you should receive this form from the crypto exchanges. Please be mindful to double check this form because it should report your gross profit, but not include the original basis which will affect your potential tax bill.
- 1099-Misc: You may receive this form if you receive compensation in sort of miscellaneous way such as interest income (staking) or completing a reward on an exchange for compensation such as watching an educational video.
Please note – tax forms you may download or receive from an exchange may not be entirely accurate or complete so if you are active across multiple exchanges or wallets, please double check the history and ensure it is up-to-date and accurate. Do not blindly trust them.
After a brief summary of the various tax reports you may expect to receive from the exchanges and what they mean, owners and traders of crypto should be filing IRS tax forms 8949 and Schedule D when they submit their personal income tax return. Form 8949 is used to report the cryptocurrency & NFT gains and losses. This information can be found from the 1099-B or other above tax reports I referenced. Schedule D summarizes what you reported on 8949.
Lastly, when filing your personal income tax return, the IRS mentions if you bought crypto with currency such as U.S. dollars or received it as a gift and did not sell in 2021, you don’t have to report it on the 1040 (checking the box). The folks who need to report their crypto transactions are:
- Sold crypto in 2021.
- Bought something (like an NFT) with crypto.
- Received crypto from “mining” (process of creating new bitcoin)
- Earned interest through “staking” (process of loaning/pledging crypto to earn interest).
- If you traded/exchanged one crypto for another (Ex: Ether for Bitcoin).
Even if you do not owe any taxes on the above actions, you still have to report them. Failure to report this is deemed as tax fraud. The NFT and cryptocurrency space is very fast paced and I believe the IRS will begin to make an example out of folks who try to bend the rules or omit key information.
We hope that this information may be helpful to you, or to a family member or a friend. If you have any questions, please don’t hesitate to reach out to your ACM Wealth Advisor.
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