Form 1040, which U.S. taxpayers use to file an annual income tax return, has a question about “virtual currency” near the top of the first page. No worries – our tax preparation services for cryptocurrency investors can help you maximize your return.
The tax season is fast approaching — and the IRS has its eye on crypto investors.
To the federal government, investors must report taxable 2021 transactions involving bitcoin, ethereum, dogecoin, and other cryptocurrencies.
Is there a cryptocurrency tax? If you’ve invested in Bitcoin or another form of Cryptocurrency, understand how the IRS taxes these types of investments and what constitutes a taxable event.
Interest in Cryptocurrency has grown tremendously in the last several years. Whether you accept or pay with Cryptocurrency, invest in it, are an experienced currency trader, or receive a small amount as a gift, it’s important to understand cryptocurrency tax implications.
You may have heard of Bitcoin or Ethereum as two of the more popular cryptocurrencies, but there are thousands of different forms of Cryptocurrency worldwide.
How Cryptocurrency Transactions are Taxed
People might refer to Cryptocurrency as a virtual currency, but it’s not an actual currency in the eyes of the IRS. According to IRS Notice 2014-21, the IRS considers cryptocurrency property, and capital gains and losses need to be reported on Schedule D and Form 8949 if necessary.
Like other capital gains and losses, your gain may be short-term or long-term, depending on how long you held the Cryptocurrency before selling or exchanging it.
- If you owned the Cryptocurrency for one year or less before spending or selling it, any profits are typically short-term capital gains, which are taxed at your ordinary-income rate.
- If you held the Cryptocurrency for more than one year, any profits are typically long-term capital gains, subject to long-term capital gains tax rates.
How you report Cryptocurrency on your tax return depends on how you got it and used it.
If You Mine Cryptocurrency
Cryptocurrency mining means solving cartographic equations to validate and add cryptocurrency transactions to a blockchain. In exchange for this work, miners receive Cryptocurrency.
If you earn Cryptocurrency by mining it, it’s considered taxable income. It might be reported on Form 1099-NEC at the fair market value of the Cryptocurrency on the day you received it, just as if it were self-employment income. You need to report this taxable income even if you do not receive a 1099 form.
If You Receive Cryptocurrency as Payment for Goods or Services
Many businesses now accept Bitcoin and other cryptocurrency payments. If someone pays you Cryptocurrency in exchange for goods or services, the payment counts as taxable income, just as if they’d paid you via cash or check. For tax reporting, the dollar value that you receive for goods or services is equal to the Cryptocurrency’s fair market value on the day you receive it.
If You Sell or Spend Cryptocurrency
If you mine, buy, or receive Cryptocurrency and eventually sell or spend it, you have a capital transaction resulting in a gain or loss just as you would if you sold shares of stock. This is where cryptocurrency taxes can get complicated.
For example, let’s say you receive $400 worth of Cryptocurrency Litecoin in exchange for services on January 15. Six months later, on July 15, the fair market value of your Litecoin has increased to $1,000, and you use it to buy plane tickets for a vacation. On your tax return for that year, you should report $400 of ordinary income for receiving the Litecoin in January and a short-term capital gain of $600. That’s the $1,000 value of your Litecoin when you purchased the plane tickets, minus your $400 basis when you received the Litecoin.
Those two cryptocurrency transactions are easy enough to track. But imagine you purchase $1,000 worth of Litecoin, load it onto a cryptocurrency debit card, and spend it over several months on coffee, groceries, lunches, and more. If, like most taxpayers, you think of Cryptocurrency as a cash alternative and you aren’t keeping track of capital gains and losses for each of these transactions, it can be tough to unravel at year-end.
If you exchange one type of Cryptocurrency for another Cryptocurrency enthusiasts often exchange or trade one type of Cryptocurrency for another. For example, say you have $1,000 worth of Litecoin and exchange it for $1,000 worth of Ethereum. If you originally paid $300 for Litecoin, you have to recognize a $700 capital gain when you make the exchange.
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