Interest in cryptocurrency has grown rapidly in recent years, bringing with it tax implications people should know.
• The IRS treats cryptocurrency as “property.” If you buy, sell or exchange this virtual currency, you’re likely going to need to pay crypto taxes.
• You can also trigger tax liability for crypto activity by earning it as income or using it as currency for your purchases.
• Other actions that may generate a taxable event include crypto mining, airdrops, staking rewards, and crypto-to-crypto swaps (including non-fungible tokens, or NFTs).
• Depending on the type of activity, you'll report your crypto gains and losses on Form 1040 Schedule D, or crypto income either on Form 1040 Schedule C for self-employment earnings or Form 1040 Line 1 as employment wages.
How is crypto treated for taxes?
The IRS ruled that cryptocurrencies are “property” in IRS Notice 2014-21, giving virtual currencies the same treatment as stocks, bonds or gold. This means if you traded crypto in a taxable account or you earned income from activities such as staking or mining, you have taxable events to report on your return.
If you sold or exchanged crypto during the tax year, you’ll likely need to report this activity on Form 1040 Schedule D and Form 8949 if necessary. If you earned crypto working as a freelancer, independent contractor or gig worker and were paid in cryptocurrency or for crypto-related activities, then you may need to report this on Schedule C and pay taxes on your crypto earnings.
Below, we cover some popular cryptocurrency tax myths and clear several misconceptions people might have.
Crypto Tax Myth #1: Crypto Isn’t Taxable
Crypto activity is taxable and needs to be reported to the IRS in most situations. If you sell or exchange crypto (including one crypto for another), this creates a taxable event that you’ll need to report on your tax return as a capital gain or loss.
Likewise, if you’ve earned crypto for work you’ve performed or as a promotion tied to activities such as staking, these transactions are taxable as ordinary income.
The IRS chose to step up enforcement of taxes on crypto by placing a question at the top of Form 1040 asking, “At any time during 2022, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
By adding this simple question, the IRS has removed any doubt about whether cryptocurrency activity is taxable. Your broker or exchange may not provide you with a Form 1099 reporting this activity, but you’re still obligated to report it. If you do receive a Form 1099 from your broker or exchange, and the information presented is incorrect, you should provide the correct details on your tax return through Schedule D and Form 8949.
If you only purchased crypto during the tax year but made no other transactions with it, you won’t need to report this activity. Much like buying stocks and bonds and holding them in your investment account, you don’t need to report this information to the IRS on your tax return if it isn’t accompanied by a subsequent sale or exchange. In the year of disposition, you'll need to provide details related to your sales price, cost basis, and holding period.
TurboTax Tip: The American Infrastructure Bill of 2021 makes cryptocurrency exchanges required to send 1099-B forms starting in tax year 2023. Until then, if you don’t receive a Form 1099-B from your crypto exchange, you must still report all crypto sales or exchanges on your taxes.
Crypto Tax Myth #2 - The blockchain is fully anonymous and the IRS can’t trace your crypto transaction activity.
Crypto has been promoted as a secure, decentralized, and anonymous form of currency. While true in many respects, the IRS can track your crypto wallets and the activity surrounding them.
The blockchain is a public ledger where all transactions are recorded and verified in a decentralized manner through various means. As a result, all transactions exist in the public domain. This public transparency allows the IRS to link wallets to specific people, despite the appearance of anonymity. When registering for a wallet, you must follow know-your-customer (KYC) rules, tying your identity to a specific wallet. Exchanges and brokers must also collect this information, providing it to the IRS for reporting purposes.
If you trade on an established exchange complying with KYC protocols, the IRS can follow your transactions and associate them with you. In short, the IRS can employ blockchain analytics tools to identify your crypto activity. Therefore, you’ll need to make sure you report all of your crypto transactions on your tax return.
Crypto Tax Myth #3 - You only owe taxes to the IRS if you receive a Form 1099-B.
Not every source of income may be documented on the appropriate IRS form by your employer or clients. As you gather your documents and prepare your tax checklist items, don’t forget that you still need to report it on your tax return.
Employers are required to send you a Form W-2 if they paid you $600 or more during the tax year (or if they withheld Social Security, Medicare or income taxes from your wages, regardless of the amount of wages paid). Likewise, if you earned more than $600 working as a freelancer, independent contractor or gig worker for a client, generally, they should send you a 1099-NEC to report your earnings. In the case of trading on a crypto exchange, you might not receive any 1099-B forms reporting your activity. That’s because until tax year 2023, crypto exchanges aren’t required to report your trading information to the IRS via Form 1099-B.
Regardless, if you placed trades on a crypto exchange that resulted in capital gains or losses, you’ll need to report this activity to the IRS. Typically, you should be able to download your transaction activity from the exchange and use this to prepare your Schedule D for tax reporting purposes.
Crypto Tax Myth #4 - If you hold your crypto through a private wallet instead of a crypto exchange, you don’t need to report crypto gains or losses on your tax return.
Private wallet or public crypto exchange, you still face the same tax rules. If you made trades that resulted in capital gains or losses, you need to report your activity to the IRS regardless of how you stored the crypto.
Private wallets don't necessarily obscure your trading activity as the blockchains for cryptos are publicly accessible and can be tied to individuals through blockchain analytics capabilities and methods by the IRS. You should report all crypto gains and losses on your tax return, regardless of whether it took place on a crypto exchange or through a private wallet.
Changes Under the American Infrastructure Bill of 2021 Require Tax Compliance Reporting
The American Infrastructure Investment and Jobs Act of 2021 included several provisions directly related to crypto asset information and reporting required of brokers. The law expanded the definition of “broker” to include anyone who transfers digital assets on behalf of another person.
As a result, brokers who assist clients with placing crypto trades will need to begin reporting this activity on relevant crypto tax forms, namely Form 1099-B, starting in tax year 2023.
Until then, you should still report all of your crypto activity on your tax return.
Report Your Crypto Activity
Several crypto tax myths have led many to believe crypto activity isn’t taxable, though the IRS has made it clear that it is by placing an important question on Form 1040. Whether the crypto exchange, private wallet, broker or other service you use for your crypto activity reports this information to the IRS or not, you’re still liable for any capital gains or losses that result. Make sure you gather all of your crypto information and report it accurately on your tax return each year.
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