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How to report cryptocurrency when filing taxes

Plus, tax software that will help get the job done.

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If you invested in cryptocurrency in 2021, guess what? You'll need to report that Bitcoin, Ethereum, and Tether you traded on your tax returns. Similar to gold and silver, the IRS classifies virtual currency as "property." So if you bought, sold, or exchanged crypto, you’ll most likely get hit with a tax bill.

Here's what you need to know about reporting cryptocurrency on your tax returns, plus tax software that can help you prepare for this tax season.

When do you owe taxes on cryptocurrency?

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The IRS currently classifies cryptocurrency as property.

Investors commonly misreport their total earnings or income linked to crypto, according to Sean Stein Smith, founder of the Institute for Blockchain & Cryptoasset Research. "Individuals aren't really sure if they have ordinary income, capital gains—or is it a business or a hobby?" Smith says.

When you'll be taxed on cryptocurrency falls within two major buckets. First, income events are considered taxable. Some examples include earning crypto interest from decentralized finance and earning crypto from mining income, or staking or liquidity pools. Receiving crypto from an airdrop or for completing a task also falls under this category.

Capital gains events are taxable, too. "Every time you trade cryptocurrency, it's a taxable event," Smith says. If you've sold cryptocurrency for money, those are taxable events. And if you've used virtual currency for goods or services, you might owe money to Uncle Sam.

Furthermore, "coin-to-coin trades do owe taxes." This is also the case with non-fungible tokens: ​​"NFTs are a version of crypto and remember, all crypto is treated as property, so there's an income tax impact," Smith says.

Because the IRS considers cryptocurrency a digital asset, it's taxed the same way as stocks, bonds, and property—on the capital gains. If you sold cryptocurrency in 2021 and made a profit, the capital gains are taxed.

If you held the cryptocurrency for a year or less, that would mean it's a short-term gain. If you held onto it for a year or more, it falls under a long-term gain. This period starts the day after you obtained the virtual currency to the day you sold or traded it.

The IRS annually adjusts rates for capital gains, and it depends on your income and filing status. For 2021, the tax rate for long-term capital gains is anywhere from 0% to 20%. For short-term capital gains, the tax rates range from 10% to 37% of your taxable income.

So, when won't you be taxed? If you bought crypto with U.S. dollars and kept it in your crypto wallet, but didn't do any trading, you won't be taxed. Nor will gifts of cryptocurrency under $15,000, donating crypto to a tax-exempt organization, or transferring crypto from one wallet to another fall under taxable events.

Gather your cryptocurrency transaction records

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Before you prepare your taxes, go through your crypto trading history.

Here's the kicker: While online trading brokerages issue 1099s to customers, not all crypto wallets will issue 1099s—and if they do, they might not always be correct. "Even if you get 1099s from large organizations like Coinbase, which are trying to start getting 1099-type information out to their customers, oftentimes they're incorrect," Smith explains.

In turn, it's important to do your part and gather as much documentation as possible. This includes going through your trading history.

Depending on whether it's ordinary income or capital gains, you'll need to indicate your earnings or capital gains on your Schedule D Form 1040 (for ordinary income) or Form 8949 (for capital gains). If you made money from crypto as a self-employed person, you'll need to report it on your Schedule C. Expect to do a bit of simple math, Smith says, adding: "The complexity of the math will be directly linked to how much trading the taxpayer does."

Fill out your Form 1040

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You'll find a question relating to virtual currency as you fill out your Form 1040.

As you fill out the Form 1040, you’ll see this question: Did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? It's nestled underneath where you fill in your personal information and address—and it's not a question you can skip.

Check the "yes" box if any of the following situations apply to you:

  • You received cryptocurrency as payment for goods and services. (This must be included in your gross income.)
  • You successfully "mined" cryptocurrency. (This must be included in your gross income.)
  • You made a payment using cryptocurrency. (It's subject to information reporting.)
  • You received or transferred virtual currency for free that doesn't qualify as a gift under federal tax rules.
  • You received cryptocurrency from a hard fork.
  • You used cryptocurrency for goods, services, or property.
  • You traded cryptocurrency for another type of cryptocurrency.
  • You sold cryptocurrency.
  • Anything else related to cryptocurrency as it relates to financial interest.

“Be as transparent and upfront as you possibly can," Smith says. "The IRS has been very proactive and very blunt in their focus around cracking down on crypto tax avoidance. On an annual basis, the IRS estimates they are going to collect between $28 and $30 billion in crypto taxes as a part of the budgeting process on that [$1.2 trillion infrastructure] bill. So it's a top priority for them."

Consider tax software to help with the process

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Some online tax software, including TurboTax, include features to help with cryptocurrency transactions.

A few online tax software have built-in features to report cryptocurrency transactions. (Of course, you may need to upgrade to another software tier depending on your tax situation.)

For instance, TurboTax Premier lets you import up to 4,000 crypto transactions from cryptocurrency exchanges, and up to 10,000 stock transactions from hundreds of participating financial institutions. At the time this was published, the tier starts at $69 for federal returns, plus $39 for each state return.

H&R Block Premium also enables you to report stock sales and capital gains, and you can import transactions and investment income info from participating financial institutions. With current promotions, you can file your federal returns starting at $49.99, with an additional $36.99 per state.

TaxAct Premier can also help you figure out how much you owe on taxes with your investments. You can import and export your stock data. TaxAct's Premier starts at $34.95, with an extra $44.95 tacked on for each state.

Additionally, there are a handful of accounting platforms specializing in digital assets that have recently sprouted up—namely, Gilded, CoinTracker, and CryptoTrader Tax (soon to be CoinLedger). These might be a good option if you need help with accounting for cryptocurrency year-round.

One final note: As regulations and tax rules constantly change around virtual currency, it's important to stay on top of these shifts. "It's really critical that if you're involved in this space, to be educated and be proactive to keep yourself up to date," Smith says.
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