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The last few years was massive for cryptocurrency investing with many jumping on the cryptocurrency bandwagon. According to a 2021 survey by NORC, a nonprofit research group, 13% of Americans had purchased or traded crypto between July 2020 and July 2021.
If you've recently invested in crypto, you may be wondering if you need to pay taxes on your investments. Learn more about how crypto is viewed and taxed by the IRS, how to report it on your taxes this year and how to be prepared come tax time.
Do I Have to Pay Taxes on Crypto?
Yes, cryptocurrency trading is taxable. Any cryptocurrency earnings or transactions that resulted in gains become a taxable event. The IRS views cryptocurrency as an asset similar to stocks and other taxable investments and must be included in tax filings.
While crypto is making headlines in the news recently, the IRS issued a notice on the topic as far back as 2014. According to the IRS:
"In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability."
With the rising popularity of crypto, the IRS has been taking measures to ensure that crypto investors fulfill their tax obligations. In 2019, the IRS sent letters to over 10,000 taxpayers who potentially failed to report income from cryptocurrency transactions. The letters served as a warning and instruction to pay back taxes owed for crypto income.
What Cryptocurrency Transactions Are Taxed?
How to properly report cryptocurrency on tax returns will depend on the type of transactions that occurred.
Cryptocurrency transactions that can result in tax liabilities include:
- Crypto mining
- Exchanging one cryptocurrency for another
- Receiving crypto as payment for goods or services
- Sellling crypto
- Spending crypto on goods or services
Cryptocurrency isn't taxable if it's bought with cash and simply held onto. Crypto only becomes taxable when it is sold or traded and results in increased value.
The IRS recently made a change on Form 1040 to include cryptocurrency. Forms now include the question: "At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"
If your answer to the question is "yes," you should plan on including income made from crypto on your tax return.
How Do I Report Crypto on My Taxes?
Depending on your situation, capital gains and losses can be reported via Schedule D or Form 8949. Form 1099-NEC can be used to report taxable income from crypto mining.
When reporting cryptocurrency on tax filings, you need to include how crypto was received, the value of the crypto, how it was used and how long it was held. Visit the IRS' Frequently Asked Questions on Virtual Currency Transactions for more information and consult a tax professional for guidance.
Is Crypto Taxable if They Were Gifted?
Receiving crypto as a gift is not necessarily a taxable event for the recipient. Where it becomes taxable is when the gifted crypto is sold and results in a capital gain.
However, the gifter may need to report the gift depending on the value of the cryptocurrency that was gifted. Consult a tax professional for more guidance if these scenarios apply to you.
Cryptocurrency Tax Filing Tips
Here are some other tips to consider when reporting crypto on tax filings.
- Consult a tax professional: Since cryptocurrency is still rather new, consult a seasoned tax pro for guidance on what to claim and how to report crypto income on your tax return. They can also help you determine whether you owe back taxes on unclaimed crypto investments from prior years. Some online tax services now offer help regarding cryptocurrency and taxes too.
- Keep detailed records: Having detailed records of any cryptocurrency transaction, big or small, can make it easier to keep track of what needs to be reported. Most cryptocurrency exchanges allow customers to download transaction reports. Gather any information concerning your crypto transactions, so you're prepared when filing your tax return.
- Plan ahead: If you've invested in cryptocurrency in any way, shape or form, plan ahead and avoid waiting until the very last minute to file. Missing tax filing deadlines or accidentally leaving out important income from crypto can incur penalties from the IRS.
For those who plan to continue buying, selling and trading crypto, be prepared to include your cryptocurrency transactions in your tax return going forward. Consult a tax professional for tax advice related to your circumstances.
Frequently Asked Questions
Typically, yes, you do need to pay taxes on cryptocurrency investments. Some of the common types of crypto transaction may need to pay taxes on are:
- -Crypto mining
- -Exchanging one cryptocurrency for another
- -Receiving crypto as payment for goods or services
- -Sellling crypto
- -Spending crypto on goods or services
Consult a tax professional for guidance.