A guide to navigating tax season for crypto investors, especially as the IRS ramps up its enforcement in this area
Tax Day is almost upon America—April 18th—and if you haven’t filed your taxes yet, you might be wondering if the government will get a cut of the Bitcoin you bought several months ago. The IRS mostly treats cryptocurrency as property, meaning you might have to pay taxes on your holdings. But there’s a lot of fine print, and it’s important to wade through it all, because the agency has stepped up its enforcement to nail tax dodgers. “This is an area where the IRS is looking heavily to audit, because I think they see it as a high revenue raiser,” says Taylor Weinstein, counsel at Pryor Cashman LLP, where she is a member of the company’s tax and investment management groups. “It’s important to keep as detailed records as you can.”
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Of course, an accountant might be able to help you sort through it all, as will one of the many crypto tax software packages that have emerged in the last few years. But to get you started, here’s a brief primer on how to declare your digital assets.
If you only bought crypto as opposed to selling it, then you’re in the clear. The IRS only becomes interested after you take some sort of action upon the crypto you’ve bought. Bitcoin that’s just sitting in your Coinbase account or Metamask wallet, no matter how much it appreciates, is tax-free.
On the very first page of 2022 tax returns, the IRS has signaled the importance of crypto by asking: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any virtual currency?”
If you simply bought crypto with fiat currency and took no later action upon it (other than moving it to another crypto wallet), then you can safely choose “no.” If you did anything else—including buying NFT or a product online, staking your crypto, or converting it back into cash—then you should choose “yes.”
The IRS treats the selling of crypto like selling shares of stock, which necessitates reporting your capital loss or gain. If you bought $500 worth of Bitcoin and then sold it for $800, for example, you’d need to report a $300 capital gain.
How that $300 gain is taxed depends on how long you’ve held your Bitcoin. If you bought it more than a year before selling it, you’ll pay a lower rate (according to long-term capital gains rates). If you bought it within the year, it can carry a tax rate of up to 37%, depending on how much you made on the sale.
Every time you sell crypto is considered a separate taxable event that you’ll need to keep track of. Some crypto exchanges have started issuing a tax form called the 1099-K for their most active traders (i.e. those that have exceeded $20,000 in gross payments and 200 separate transactions). “This is the IRS’s number one line of defense right now, because those 1099-Ks are filed with the IRS at the same time as they are delivered to the recipient,” Weinstein says. “It is going to be the IRS’s weapon in finding taxable crypto transactions.”
But even that form is incomplete in terms of the information that the IRS wants from you. It’s important to keep track of every transaction, and enter them into IRS’s Form 8949 in order to reconcile your capital gains and losses. All that information then should be reported on your Form 1040 tax return using Schedule D.
Don’t panic: you can offset up to $3,000 of your taxable income each year. Any excess losses beyond that can be rolled forward to future tax years, as offsets to future gains.
That’s a taxable event. If you bought Ethereum for $500, watched it appreciate to $1000, and then sold it for Solana, you’d report a $500 capital gain that you’d have to pay taxes on.
Each of those is considered taxable income, which should be reported on your tax return on Schedule 1, as “Other Income.” The value you must report is from the day and time you earned the cryptocurrency (as opposed to the day you filed the taxes). This IRS FAQ has additional information on reporting virtual currency income in more specific cases.
Sorry – these count as taxable events. You’ll need to report each transaction, just as if you were selling stocks. For this reason, it’s extra important to keep track of all the crypto leaving your wallet, and the type of currency you’re using. You can look up your own blockchain transactions via websites like Etherscan and blockchain.com/explorer.
While the IRS hasn’t released any specific tax guidance on NFTs, experts agree that most transactions involving NFTs are taxable if they involve crypto. If an artist mints an NFT, for example, they have a capital gain or loss on the crypto that they exchanged in the minting process. Likewise, they also would have to pay capital gains tax when that NFT is sold.
If you’re a professional NFT creator, then you can deduct certain business expenses, just as you would for any other type of business.
Every transaction bought with cryptocurrency, including NFTs, is subject to capital gains tax. Same rules apply as before: The amount you owe depends on how long you held the NFT and whether you made a profit. You can claim losses on NFTs in your taxes.
One aspect that the IRS has not resolved is whether they consider NFTs as “collectibles,” which are a separate category of asset under the tax code. For now, Weinstein says that to categorize your NFTs as collectibles “seems like that would be the right approach.”
Because stablecoins rarely fluctuate in value—as many of them are pegged to the U.S. dollar—it’s far less likely you’d have a capital gain or loss when using them. Nevertheless, using stablecoins to pay for things is still considered a taxable event that you have to report.
You can claim a deduction if you itemize properly (for the value of the crypto on the time and date of the contribution). You don’t have to pay capital gains taxes in this instance.
The IRS will be watching you, especially if you’re an active trader. The agency has subpoenaed centralized crypto exchanges for information about noncompliant U.S. taxpayers. In 2021, they issued John Doe summonses to crypto exchange operators Kraken and Circle in order to locate individuals who traded $20,000 or more in crypto from 2016 to 2020.
Plenty of crypto tax software solutions have been created to ease this process; they include CoinTracker, TokenTax, CryptoTrader.Tax. Many of those sites are also compatible with regular tax programs like TurboTax or TaxAct. Alternatively, there are a growing number of CPAs that specialize in cryptocurrency.
If you actively traded crypto and/or NFTs in 2021, you’ll have to pay the taxman in the same way that you would if you traded stocks. If you lost money on crypto due to price fluctuation, you can deduct up to $3,000 in capital losses. The IRS has shown itself to be keenly interested in this space and will likely continue to formulate rules as the space develops. So don’t think of this year’s aggressiveness as a blip, but rather the new normal.
