Investing and spending in cryptocurrencies was once again a hot topic in 2021 as stocks like bitcoin, dogecoin, ether and others set record valuations and their commercial use became more widely accepted – think that Tesla accepts bitcoin and dogecoin as payment methods for its electric vehicles. , and many top athletes and public figures receiving their salaries in cryptocurrencies. But as cryptocurrencies attract the attention of more investors and consumers, they are also attracting the attention of regulators, including the IRS. In fact, as we head into tax season, the IRS prominently asks on Form 1040: “At any time in 2021, did you receive, sell, trade, or otherwise dispose of a financial interest in virtual currency? ?
So, as taxpayers prepare their 2021 tax returns, here are the top things to remember when following IRS guidelines for reporting taxable cryptocurrency purchases, sales, exchanges, and transactions:
Generally speaking, the purchase of cryptocurrency is not a taxable event. If you jumped on the cryptocurrency bandwagon in 2021 and bought cryptocurrency but didn’t trade or spend it, you probably don’t owe any tax on it. So far, the IRS has described the following taxable situations:
- Sell your cryptocurrency for cash.
- Exchanging one cryptocurrency for another.
- Use cryptocurrency at a merchant as a means of payment, including through a cryptocurrency-based debit card.
- Receiving airdropped tokens resulting from a hard fork.
- Staking or cryptocurrency mining.
- Get paid in cryptocurrency.
In other words, if a taxpayer has simply purchased a cryptocurrency and continues to hold it in their brokerage account or digital wallet and has not sold, traded or traded it, there are probably no consequences. tax or additional declaration required. Gifting or donating cryptocurrency and transferring it between exchanges or brokers are also non-taxable events.
Cryptocurrency is subject to capital gains tax. In the eyes of the IRS, cryptocurrencies are property and are generally taxed like stocks, so when cryptocurrency is spent or traded, these are taxable transactions, and a taxpayer must report any gains or losses. capital on their tax return. The capital gain or loss is based on the difference between the acquisition price and the sale proceeds and the holding period.
When you are paid with cryptocurrency, it is treated as income at the fair market value of the digital asset on the date you receive it. As cryptocurrency becomes more mainstream, it also gets paid for goods and services. Employers who use cryptocurrency for wages or to pay for goods and services must still report employee earnings on W-2 forms, withhold the same amounts as if they were paying wages in dollars, and convert the value of the cryptocurrency in dollars on the date of payment. Self-employed taxpayers who accept cryptocurrency for their goods or services should track transaction dates and dollar values as transactions occur to report income and capital gains or losses when filing. their tax returns.
Careful monitoring is essential. It is the responsibility of taxpayers investing and transacting in cryptocurrencies to track all possible taxable activity and the fair market value of those transactions. Unlike traditional equity investments, 1099-B forms do not have to be issued to cryptocurrency investors by exchanges. As such, it is recommended to keep a detailed log of all cryptocurrency transactions throughout the year to ensure accurate reporting to the IRS during tax time.
Reporting cryptocurrency transactions to the IRS can be a complicated process, and while the IRS has a helpful FAQ, the Illinois CPA Society encourages taxpayers to partner with a Certified Public Accountant ( CPA) for help with accurately reporting cryptocurrency transactions throughout the year and properly filing their tax returns during tax season. The Illinois CPA Society’s free “Find a CPA” directory can help taxpayers find the right trusted strategic advisors based on location, types of services needed and languages spoken. Find a CPA at www.icpas.org/findacpa.