Your crypto transactions have tax implications, and reporting correctly to the IRS is very important in 2022. We’ve put a quick guide together for you to get set up to help protect yourself. As always, we are happy to answer questions and work with you to maximize your return and make sure you are following the latest tax laws.
A Starter Guide to Crypto Taxes
You will notice a question on your 2021 Form 1040 about cryptocurrency.
The question reads: “At any time during 2021, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
The IRS requires you to answer with yes or no. If you check the “yes” box, the IRS will expect income, transactions or reporting from crypto on your return. If you are not sure if you need to check yes, please give us a call or schedule an appointment. You can work with us in person, on an online Zoom call, or on the phone.
Since the IRS has various tracking methods and exchanges do formal reporting, it’s not a good idea to try to avoid your crypto obligation. More audits are predicted.
How It Works
- Cryptocurrency is treated like “property” for taxes.
- When you buy, sell or exchange it, it counts as a taxable event with a capital gain (or loss).
- Earning income from cryptocurrency is taxed as ordinary income.
Since the IRS considers cryptocurrency to be property for taxes, it’s taxed the same way as stocks or gold.
You will report these capital gains and income on your tax return in different forms. The most important thing you can do to prepare is to keep records of your transactions. For some of you, this means a lot of details from your digital wallets. If possible, download that transaction activity where ever possible, and include that for your tax appointment.
There are a lot of virtual currencies and digital assets, including (to name a few) — Bitcoin (BTC), Ethereum (ETH), stable coins like Tether (USDT), non-fungible tokens (NFTs), Binance Coin (BNB), USDC, Solana (SOL), XRP, Cardano (ADA), Dogecoin (DOGE), and many others. Using these can be subject to federal income tax.
Reporting cryptocurrency on your tax return depends on how you got it and how you used it.
If all of your crypto activity was within an exchange, like Coinbase or Binance, reporting may be more streamlined. It may require more effort to report for NFTs, staking, self-custody wallets, and DeFi activities. Read more about those below.
Guidelines for Reporting
When you buy and hold cryptocurrency, it is not necessarily a “taxable event”. For example, you can buy Bitcoin and hold it for years and not have to pay taxes on it.
Taxes come in to play when crypto is sold or traded, as described in some of the scenarios below. Please note: these don’t apply if you trade in tax-free or tax-deferred accounts, such as IRAs (individual retirement accounts).
I purchased crypto with U.S. dollars — if you just bought Bitcoin with dollars, you do not have to report that to the IRS, according to the 1040 guidance. Same with transferring crypto to your personal wallet (a wallet you own).
I exchanged cryptocurrency — exchanging one coin for another is taxable. For example, purchasing Bitcoin (BTC) using Ethereum (ETH) is a taxable event.
I bought something with crypto — paying for goods and services using your crypto has tax implications. For example, when you buy an item with Bitcoin, it is a transaction that can result in a gain or loss. This depends on the value of Bitcoin at the time you received your BTC, and the price of BTC when you used it as payment (effectively “selling” it at the point of sale).
I sold crypto — when you place a trade, that is a taxable event. For example, you may have sold some of your Ethereum back to U.S. dollars in your FTX account for more than you originally paid, which resulted in a gain. Similar to selling shares of a stock, your taxes will consider the cost basis (what you originally paid) and what you sold it for (resulting in a gain or loss).
I traded or minted NFTs — NFTs are non-fungible tokens, created on a blockchain to prove you are the owner of a digital item. You may be buying and selling these one-of-a-kind assets in a marketplace like OpenSea. These transactions are taxable, but the guidance from the IRS on these is seemingly limited (so far). Many factors can affect your liability, such as if you are a creator or an investor, and if it’s a hobby or a business. Here are some notes and considerations, but keep in mind these conditions can be much more nuanced:
- Paying gas fees when you mint NFTs is a taxable event.
- Trading Etherum when minting NFTs can generate capital gains (short term or long term rates below).
- Minting NFTs for your business can be treated as ordinary income (ask us for help with this).
- Generally, you can deduct expenses only if it’s part of your business.
- Once you sell or exchange an NFT, this is a new taxable event.
- Royalties you earn from an NFT is taxed as income.
I invested in NFTs — taxes for these investments work much the same way as crypto trading. NFTs can be considered “collectibles” for taxes, especially for artwork. Collectibles are subject to capital gains, just like other cryptocurrencies. When you buy an NFT with Ethereum (or sell the item), what you owe will be reported based on if you made a profit and how long you held the NFT (short term or long term). You can claim losses, too.
Short Term and Long Term Capital Gains
How long you hold crypto before a sale or transaction plays a part in what you report.
In a simple trade example where you made money — you buy $500 of Bitcoin, and then sell it for $1,000. You will have a capital gain of $500. This is calculated as: sale price ($1,000) minus the cost basis ($500) = +$500 profit.
Similarly, in a trade you lost money — you buy $500 of Bitcoin, and then sell it for $400. You will have capital loss. This is calculated as: sale price ($400) minus the cost basis ($500) = -$100 loss.
Important note: you can adjust your cost basis (what you paid) by subtracting any fees or commissions paid to complete the transaction. Since what qualifies for this varies (adjusted cost basis and adjusted sale amount), it’s important to get the most up-to-date guidance before making your calculations.
Keep in mind: your losses can reduce the gains for tax purposes. Individual filers can deduct up to $3K of losses from taxable income if losses exceed gains.
The Difference Between Short and Long Term
Generally, you can follow these guidelines:
Short-term capital gain — bought and sold it within a year. Taxed as as ordinary income, following the 2022 guidelines.
The tax rates for long-term and short-term are different. Your overall taxable income can vary these rates, too.
Here are the relevant tax forms:
- Form 8949 — capital gains and losses.
- Form 1040 — Schedule D.
Side note: non-business related NFT trades can also be reported on Schedule D. Code “C” in column F can designate an NFT sale as a “collectible”. We recommend working with a tax professional, please contact us.
Short-Term Tax Rates
Calculate your short-term capital gains or ordinary income earned through crypto trades bought and sold in less than a year.
|Single||Taxable Income Up to $9,950||$9,951 to $40,525||$40,526 to $86,375||$86,376 to $164,925||$164,926 to $209,425||$209,425 to $523,600||Over $526,601|
|Head of Household||Taxable Income Up to $14,200||$14,201 to $54,200||$54,201 to $86,350||$86,351 to $164,900||$164,901 to $209,400||$209,401 to $523,600||Over $523,600|
|Married Filed Jointly||Taxable Income Up to $19,900||$19,901 to $81,050||$81,051 to $172,750||$172,751 to $329,850||$329,851 to $418,850||$418,851 to $628,300||Over $628,301|
|Married Filed Separately||Taxable Income Up to $9,950||$9,951 to $40,525||$40,526 to $86,375||$86,376 to $164,925||$164,926 to $209,425||$209,426 to $314,150||Over $314,151|
Long-Term Tax Rates
Calculate your long-term capital gains for crypto held for more than one year.
|Single||Taxable Income Up to $40,400||$40,401 to $445,850||Over $445,850|
|Head of Household||Taxable Income Up to $54,100||$54,101 to $473,750||Over $473,750|
|Married Filed Jointly||Taxable Income Up to $80,800||$80,801 to $501,600||Over $501,600|
|Married Filed Separately||Taxable Income Up to $40,400||$40,401 to $250,800||Over $250,800|
Crypto Income and Other Events
Did you receive cryptocurrency as payment for work? Does your business accept Bitcoin as payment? Receiving income this way, instead of U.S. dollars, should be reported.
Likewise, mining coins or receiving tokens as a reward are included as income. The market value of that crypto at the time you receive it, will contribute to your gross income calculation.
“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.” -Source: Internal Revenue Service
If you mine cryptocurrency — miners receive cryptocurrency as a “reward”. If you earn cryptocurrency this way, it is taxable income and could be reported on a Form 1099-NEC. It should be priced at the “fair market value” on the day you received the reward. This income must be reported even if you do not receive a form 1099.
If you receive cryptocurrency as payment for goods or services — businesses that accept Bitcoin and cryptocurrency should consider those the payments as taxable income, just like cash or credit card. When reporting for taxes, the dollar value is the “fair market value” of the cryptocurrency on the day and time you received it.
If you participate in a fork or airdrop — when a crypto project sends out free tokens as an airdrop, the new coins count as a taxable event, and taxes should be factored in on these new coins. A hard fork (change in the blockchain’s protocol) doesn’t always mean new crypto is issued. If you do receive an airdrop with new virtual currency following a hard fork, this will be considered ordinary income for tax purposes. If you do not, the fork is not a taxable event for you.
If you stake cryptocurrencies — “staking” earns rewards, similar to earning interest. This money paid to you is taxable income, valued at the fair market value at the time you earn it.
If you give to charity — you can donate cryptocurrency to qualified charities, and, depending on how you itemize, get a tax deduction. Deduct the fair market value of your cryptocurrency at the time of the donation. When done correctly, you do not have to pay capital gains taxes on donations. Giving crypto to charity is considered non-cash charitable contributions. It is recommended you obtain documentation from the charity, especially for gifts over $250 in value.
If you lost crypto or it was stolen — in most cases, you cannot deduct these as losses. The two categories that the IRS recognizes for losses of capital assets include theft and casualty losses. Technically, both can apply in certain instances. For example, theft can apply if your wallet is hacked, or even if your exchange is hacked. Casualty loss could possibly apply when crypto is sent to the wrong wallet or similar “sudden” loss events (please note: there are other factors that would come in to play for these situations). Either way, you cannot deduct these kinds of losses due to new tax laws effecting tax years 2018 to 2025.
If you make a tax-free crypto transaction — transactions in a Traditional IRA (tax-deferred) or a Roth IRA (tax-free), can avoid taxation. You may also avoid taxes by holding your crypto long-term (more than 12 months) and selling it under certain filing and income scenarios. Your taxable income must be less than or equal to $40,400 (single filer), or less than or equal to $80,800 (married filing jointly). As you can see on the long-term capital gains table above, these conditions put you at 0% long-term capital gains tax.
Keeping Records and Planning for the Future
IRS guidance outlines that you should keep records, like date, time and value. If you receive Form 1099-B, that will help you with your records, and any activity on those forms should be included in your return. Looking ahead, you will see more 1099-B forms from crypto exchanges in tax year 2023, based on newly established laws in the U.S. (the American Infrastructure Bill of 2021).
It’s prudent to follow all tax regulations and report appropriate crypto activities on your tax return. While crypto has “anonymous” and decentralized qualities, the IRS has some methods of tracking, including blockchain analytics tools. Exchanges and brokerages may report transactions with Form 1099-B and/or provide information directly to federal agencies, following various laws and regulations. Mining may produce the issuance of form 1099-MISC or 1099-NEC, which reports the ordinary income you earned.
Coinbase shared millions of customer transactions to the IRS after a 2016 summons. They send out 1099-MISC for rewards, and transaction detail if you exceed the $600 minimum. In 2023, all exchanges will be required to send 1099-B forms with all transaction activity. Regardless of the forms you receive, even if documented in a 1099, you must still report taxable activity.
Keep in mind: whenever you receive a form 1099, they are also issued to the IRS.
You should consider planning in advance with one of our CPAs for:
- Large portion of your portfolio is in crypto.
- Staking or mining business.
- DeFi transactions.
This information is provided for educational purposes only. Please keep in mind that your taxes are unique and your personal scenario must be considered individually. Depending on your transactions, reporting your crypto may be more complicated than the guide presented here. Our aim is to get you familiar with the tax rules involved and prepare you for what to expect. We work directly with all of our clients to work out your individual tax scenarios. Questions? Call us!