The IRS is getting serious about taxing cryptocurrency. Cryptocurrency is treated as property, and taxes could be owed when it’s sold or exchanged. Additionally, if someone is paid in cryptocurrency, the payee is responsible for paying the income tax. If your only crypto activity came from purchasing virtual currency, you don’t have to include that on your tax return.
Because cryptocurrency is considered property, its taxable value is based on capital gains or losses.
If you purchased $100 worth of cryptocurrency and sold it for $500, you would recognize capital gain of $400. If you sold it for less than you paid, you’ll have a capital loss. If your losses exceed your gains, you can offset up to $3,000 of ordinary income.
The length of time you own cryptocurrency also comes into play and the difference can affect which tax rate is applied.
Crypto bought and sold within a year is considered short-term capital, and is subject to the same tax rates you pay on ordinary income, such as wages, salaries, commissions and other earned income.Crypto that is held onto for more than a year is typically taxed at a lower rate because it’s considered long-term capital. There are currently three different tax rates which are dependent on your income.
You can use Form 8949 to reconcile your capital gains and losses, and then report them on your Form 1040 tax return using Schedule D.
Start planning now for your 2021 tax return.
Don’t wait until April to start preparing for your tax return. Get in the habit of tracking your cryptocurrency activity on a monthly basis
Starting in 2023, cryptocurrency brokers will be required to record all transactions.
Brokers will be responsible for tracking all transactions and reporting them to the IRS. They will have to disclose the names, addresses and phone numbers of their customers, as well as the gross proceeds from sales and any capital gains or losses.
If you have questions about how to track your capital gains and losses or how to report cryptocurrency on your 2021 tax returns, Kruggel Lawton’s team of experienced tax professionals are here to help.