If you bought, sold or traded cryptocurrency in 2021 you may be wondering how it is taxed. The IRS treats virtual currencies, such as bitcoins and ether, unlike some other assets and investments, and there are specific rules you will need to follow if you sold or traded these assets in the past year.

“The average investor should understand that cryptocurrency is unlike any other type of currency. Cryptocurrency is treated as property for tax purposes,” said Shaun Hunley, tax advisor at Thomson Reuters. “So every time you use a cryptocurrency or transact in cryptocurrency, you will have the potential to gain or lose on [your] tax return.”

There is an important caveat, however: if you have used fiat currency – that is, US dollars – to purchase crypto assets in 2021, you do not have to report anything about this on your return. . (For now, at least – this is a rapidly evolving area of ​​tax law, and U.S. law in general.)

However, if you have sold crypto, you will need to report this when you return. And if you have traded one crypto for another, that will also need to be reported. The good news is that reporting gains and losses is pretty straightforward once you know the ropes – and there are tools to help you out, if you’re not inclined to do the math and do the math yourself. accounting. Read on to learn everything you need to know about managing cryptocurrency on your federal and state tax returns this year.

To note: The following applies to U.S. citizens and resident aliens. If you made money with cryptocurrencies in foreign countries, you may also need to pay taxes there.

How does the IRS handle cryptocurrency on 2021 taxes?

As it has been doing since 2019, the IRS will again ask you questions about your cryptocurrency. This year the 1040 United States Personal Income Tax Return Form presents a question about crypto: “At any time in 2021, have you received, sold, traded, or otherwise alienated any financial interest in a virtual currency?” And while the IRS technically asks questions about “receiving” the crypto, it’s actually focusing on whether you unloaded it – by selling it or trading it.

“If you just buy cryptocurrency with US dollars, and that’s all you do for the year – you don’t sell it, you don’t trade it, you just keep it in your entire wallet. year – you can tick ‘no’ to that question, ”says Hunley.

The IRS updated the Digital currencies FAQ page to also emphasize this point: “If your only transactions involving virtual currency in 2020 were purchases of virtual currency with real currency, you do not have to answer yes to the question on Form 1040.”

For now, the IRS considers bitcoin and other cryptocurrencies to be property. So if you bought bitcoin and owned everything, you don’t need to mention it on your tax return.

“Ultimately, the IRS looks for taxable transactions. So if you have a taxable transaction, you should check“ yes. ”If you have a non-taxable transaction, you check“ no, ”Hunley said.

So if I just bought bought bitcoin (or other cryptocurrency) on Coinbase, for example, I don’t need to report it?

Correct. If you used US dollars to buy crypto on an exchange (or through a private transaction), you don’t need to report it.

OK, I sold bitcoin. Do I have to declare it on my taxes?

Yes. Once you sell and “realize” a gain or loss, you must report it and pay tax on any capital gain.

What are capital gains and losses?

In short, they represent the difference between the cost of an asset when you bought it and when you sold it. If the price has increased, it is a gain. If it goes down, it’s a capital loss. IRS released a longer and much more detailed explanation.

The other thing to know about capital gains is that the IRS categorizes them as short term or long term. Typically, proceeds associated with assets you’ve held for more than 365 days would be classified as long-term capital gains, which are typically taxed at 15%. All assets held for a shorter period are short-term earnings and taxed as ordinary income, at rates up to 37%.

Of course, it works both ways. If you lost money on your crypto shenanigans last year, you can now deduct those losses when you return. (Theirs limits deductions for capital losses to $ 3,000 per year, or $ 1,500 if you are married and filing separately.)

How to calculate cryptocurrency capital gains and losses?

For each transaction – partial or complete – you will need to know the following details:

  1. When you bought the parts
  2. How much you paid them (in USD)
  3. When you sold the parts
  4. How much you received for them

The more sophisticated exchanges may have a reporting mechanism to help you collect this type of information. Otherwise, unless you have kept your own detailed records, you may need to search for your email, bank, or wallet receipts.

Once you have this information in hand, several options are available to do the calculation. For example, some investors use the “first in, first out” (or FIFO) methodology, in which the first coins you buy (and the price they cost) are also the first coins you sell. We won’t cover all of the methods and math here. You can use Google to learn more about the capital gains calculation options.

I traded bitcoin (or other coin) for Ether, Dogecoin, etc. Do I have to declare it on my taxes?

Yes. The exchange of one cryptocurrency for another is a taxable event.

Which tax form should I use to declare cryptocurrencies?

Everything happens Program, the federal tax form used to report capital gains.

I paid people in bitcoin. Do I have to deposit?

Yes, you will need to report employee income to the IRS on a W-2. And if you’ve compensated contractors with crypto, you’ll need to issue them a 1099.

I sold bitcoin for $ 100 last year. Should I be worried about all of this?

Yes. If you sold bitcoin for profit, this is considered a taxable event. While the IRS typically devotes its investigative resources to the bigger fish, in terms of auditing, the team is allocating more resources to crypto forensics, and you better play it safe.

Will I receive tax forms for the crypto exchange or marketplace I use?

Some exchanges may send a Form 1099-K to clients who meet certain volume or value thresholds. Coinbase customers who have received rewards and / or fees of $ 600 or more through Coinbase, Coinbase Pro, and Coinbase Prime will get a 1099-MISC form.

Is there any software to help me solve this problem?

Yes. TurboTax, H&R Block and a few more online tax platforms will guide you through the deposit process for these kinds of transactions. If your platform of choice doesn’t support crypto, you should be able to use any system in place to report equity capital gains or losses as a surrogate.

There are also specialized tools, like Change machine, which offer dedicated support for cryptocurrency tax reporting, including more complex scenarios for frequent traders or people with multiple wallets. (Full disclosure: We haven’t tested Cointracker.IO yet and are still evaluating the crypto reporting capabilities of major tax platforms.)

Who can help me calculate my bitcoin taxes?

If you are looking for a better grip, we invite you to consult a tax expert. The basic tax code is notoriously complex, and the crypto business can get complicated very quickly. When in doubt, call a pro.

“I always tell people to let your tax preparer know early on that you invest in cryptocurrency. Tell them during the year that you have crypto and that you are going to be trading in crypto.” , Hunley said. “And if you’re going to invest in cryptocurrency, if you can hold it for more than a year, you have to. Then you get a lower tax rate and you want to profit from it.”

And, as with anything cryptocurrency: do your research, pay your taxes, and Warning.

First published on February 21, 2018 at 9:24 a.m. PT.