As it is with anything new, the IRS is playing catch up and trying to figure out the best way to handle income gained through the sale and trading of cryptocurrency. If you traded on any crypto market in 2021, your 2021 tax return might look a little different this year. Our team of CPAs is well-versed on everything crypto, and can help you navigate the intricacies of properly filing for it.

Crypto on Form 1040

With cryptocurrency exponentially gaining popularity among investors, both recreational and serious, the IRS isn’t taking any chances. On Form 1040, every taxpayer will be asked, in very clear terms, if they received, sold, exchanged, or otherwise acquired any cryptocurrency in 2021. As with anything relating to the IRS, answer honestly to the best of your knowledge–it could even end up working to your advantage if you realized any losses.

Form 1099

Traditionally, a 1099 Form is used to report income from somewhere other than your job. Oftentimes, the 1099 will get sent to you automatically by a bank or brokerage if they have records of reportable non-employment income, however, records on crypto are still in early stages, and it’s highly likely that crypto investors will not receive a 1099. This does not absolve them of reporting any gains from crypto, and beginning in 2023, brokers will be required to report that info to the IRS on a 1099, so get ahead of the curve now.

It’s not all bad–if you had to take a capital loss, you can reduce your taxable income by reporting it!

Treat Crypto Like A Stock

crypto stock

Cryptocurrency is taxed just like stock. If you haven’t realized any gains or losses by exchanging it for something else, whether that be real currency, goods, or services, then it isn’t taxable. However, if you have exchanged it, you’ve created a tax liability if the value of what you exchanged it for is greater than the cost basis of the crypto.

Cryptocurrency Capital Gains

Gains on cryptocurrency purchases are treated the same as any capital gains or capital losses. For short-term holdings of less than a year, your gains will get taxed up to 37 percent depending on your income level. For long-term holdings of greater than a year, your gains will only get taxed at 0, 15, or 20 percent.

If you incur net losses from crypto, up to $3000 can be deducted. Anything greater than that amount can be carried over to next tax year.

Crypto Mining Business Taxes

cryptocurrency mining

If you own a cryptocurrency mining business, then you can deduct your expenses just as any other business can. The value of what you produce is measured by your revenue. Your basis is determined by the income you realize at a fair market value.

Don’t try to stretch it too much–if you mine crypto as a hobby and you’re unregistered, you won’t be able to deduct any expenses.

Cryptocurrency Gift Tax

If you decide to give cryptocurrency as a gift during the holiday season to a friend or relative, it will be treated the same as any other gift–the gift tax kicks in at crypto valued at $15,000 or greater

When the recipient sells the gift, the cost basis remains the same as it was when it was given to them.

Crypto As An Inherited Asset

Inheriting cryptocurrency? The IRS treats it just like any other inherited asset–they may be subject to estate taxes if the estate exceeds $11.7 million. In keeping with the theme of being treated as stock, crypto also enjoys a stepped-up cost basis, meaning the cost basis is the market value at the time the benefactor dies.

Don’t get started on your 2021 tax return without professional help. Contact us today to get the advice you need on your cryptocurrency trading!