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If you delved into the world of virtual currency in 2021, you hopefully encountered financial success. If you did, here is what you need to know about your crypto transactions to prepare for tax season.
Any time you exchange virtual currency for real currency or goods or services, you create a tax liability. If you bought, sold, or traded cryptocurrency in 2021, you’ll need to report this transaction on your tax return. And you’ll pay capital gains tax from the sale of your cryptocurrency.
The IRS is cracking down on cryptocurrency tax reporting after estimating that only a fraction of buyers and sellers accurately reported their transactions in the past few years. In October 2019, the agency provided more detailed guidance on reporting this activity and even began asking about virtual currency transactions on the Form 1040.
Thankfully, with the help of TurboTax, filing your cryptocurrency taxes will be a breeze. Let’s dig in with more information about taxes on crypto and how TurboTax can help.
Is Crypto Taxable Income?
The IRS considers virtual currency — such as cryptocurrency — property for federal income tax purposes. The IRS has a FAQ document as part of the Internal Revenue Code answering common questions regarding virtual currency taxes.
Here are a few examples of taxable events involving cryptocurrency as income:
If someone gives you cryptocurrency in return for any goods held as a capital asset, you will have a capital gain or loss based on the difference between the fair market value (FMV) of the crypto you received and your adjusted cost basis of the virtual currency exchanged. Capital gains may be taxed at a lower tax rate than your ordinary tax rate. If the property exchanged is not a capital asset you will recognize an ordinary gain or loss. The ordinary gain is taxed at your same tax rate as your rate when you file your taxes.You’ll need to report the capital gain or loss on your federal tax return and possibly state tax returns.
Likewise, if you received virtual currency as payment for any trade or business you carried on as an individual rather than an employee, your crypto income will count as self-employment income and will be reported on Form 1099-NEC at the fair market value of the crypto at the time of receipt You’ll need to consider this income when calculating your self-employment tax.
If you received virtual currency from an employer as your wage, that currency is subject to federal income tax withholding the same as your other paycheck and will be included on your Form W-2 at fair market values when it was issued to you.
The amount of income you must report when you receive virtual currency as payment for goods or services is the fair market value of the virtual currency in U.S. dollars on the date you received it.
Are Crypto Sales Taxable?
If you sold any convertible virtual currency in 2021 or exchanged virtual currency for other property, you’ll also need to recognize capital gains or losses on the sale. Capital gains occur when you sell property for a profit. Capital losses arise when you lose money on a sale.
Short-Term. vs. Long-Term Capital Gains on Crypto
Capital gains are the amount of profit you make through the sale of virtual currency or other property. You’ll need to pay income taxes on these gains the same way you would after selling other capital assets. However, the amount of time you hold onto your cryptocurrency or other virtual currency before selling it affects your tax rate.
A short-term capital gain is any gain on assets you hold for one year or less before selling. Short-term capital gains taxes follow the same rate as your ordinary income rate. That could be up to 37%, depending on your income level.
On the other hand, long-term capital gains are gains on capital assets that you hold for longer than a year before selling. The long-term capital gain tax rate depends on your income and is typically 0%, 15%, or 20%.
Find out more >>> Short-term vs Long-term Capital Gains Tax
Understanding Crypto Capital Losses
When you sell virtual currency for less than you originally paid for it, you realize a capital loss. You can use capital losses to offset capital gains.
You can deduct capital losses of up to $3,000 from your ordinary income like wages with a maximum net loss of up to $3,000 each year ($1,500 if married filing separately).
If your net loss exceeds $3,000, you can carry the loss forward to the following year.
Who Owes Crypto Taxes?
If you bought or sold cryptocurrencies in the previous year, you may owe crypto taxes. As you prepare your 2021 taxes this year, you’ll notice a section on your Form 1040 that asks whether you have sold, sent, exchanged, or otherwise acquired any financial interest in virtual currency.
You’ll need to answer “yes” to this question if you have bought, sold, or traded cryptocurrency or other virtual currency in 2021. However, if the only transactions you participated in included purchasing virtual currency with real currency, you will not need to answer “yes” to this question.
Here are a few specific examples of taxable transactions and nontaxable transactions involving virtual currency.
Taxable crypto exchanges:
- Selling digital currency for U.S. dollars
- Using cryptocurrency to purchase goods and services
- Converting virtual currency to another form of virtual currency
- Receiving virtual currency as income from an employer or contractor
- Receiving crypto in exchange for completing goods or services
- Mining cryptocurrency
- Giving a gift of virtual currency worth more than $15,000 (subject to a gift tax)
- Receiving crypto from a hard fork
- Accepting crypto through an airdrop or as another form of free reward
Non-taxable crypto exchanges:
- Buying crypto with U.S. dollars and holding it
- Receiving virtual currency as a gift
- Giving a gift of virtual currency valued up to $15,000
- Transferring virtual currency between your own accounts or wallets
Neither of these lists is exhaustive. If you’re having trouble determining whether a crypto exchange is taxable, you may want to speak with a tax professional through TurboTax. Not reporting your virtual currency exchanges correctly could leave you with an unexpected tax bill down the line.
How Is Crypto Taxed?
When you receive cryptocurrency in exchange for goods or services, that crypto is taxed at the same rate as ordinary income based on the fair market value of the crypto on the date you received it. Additionally, cryptocurrency sales may be subject to capital gains taxes.
Here’s how to calculate a capital gain or loss for your tax return and how to determine the valuation of cryptocurrency income:
Calculating Capital Gains and Losses
You can calculate capital gains and losses on a cryptocurrency exchange by finding the difference between the virtual currency’s cost basis and its realized amount. TurboTax has a free cryptocurrency calculator that in just one screen you can easily find out your gains or losses from a transaction and calculate the taxes on crypto that you owe.
Cost basis is the original value of the virtual currency. When you purchase cryptocurrency, the cost basis is typically equivalent to how much you paid for the asset. This includes any commissions or fees you paid. However, anyone who receives virtual currency from mining or staking can use the asset’s fair market value as its cost basis.
Realized amount is the sale price of the virtual currency minus any commissions or fees. This amount encompasses all of the forms of compensation you received for the sale.
You can calculate your capital gain or loss of a cryptocurrency sale with this formula:
Realized amount – cost basis = capital gain (or capital loss)
If this figure is a positive number, you have realized a capital gain from the sale. If the figure is a negative number, you have incurred a capital loss. You can use capital losses to offset your tax liability for gains lowering the taxes you owe.
Calculating Crypto Income
When you receive virtual currency as income from an employer or in exchange for any goods or services, you’ll owe taxes on that income the same way you would on other forms of income. You can calculate how much taxes you owe based on the cryptocurrency’s published value or fair market value when you received it.
If your cryptocurrency has a published value when you receive it, you can use this value for tax purposes. If not, you’ll need to use the fair market value. The fair market value of a virtual currency is an estimate of what that digital currency would sell for on the open market.
If you received your cryptocurrency through a cryptocurrency exchange platform, you can use the fair market value recorded by the platform. If you do not have access to this valuation, you can use the value determined by a cryptocurrency or blockchain explorer.
Special Considerations for Virtual Currency Taxes
Like taxes on other capital assets, crypto tax reporting can become more involved if you made a significant amount of money in sales, gave crypto as a gift, or completed any other unique exchanges. Here are a few special considerations and tax rules to keep in mind that may affect your tax implications for virtual currency transactions.
You May Still Owe Taxes on Virtual Currency Even If You Did Not Receive a 1099
Even if you did not receive a Form 1099 for your crypto sales, you may still owe taxes on capital gains. Because virtual currencies are still relatively new, there isn’t the same level of reporting requirements for entities issuing these currencies as there is for traditional income. As a result, the entity from which you received your cryptocurrency or completed your transaction may not send you a 1099 form.
If you meet any of the above requirements for people who owe income tax or capital gain tax on virtual currencies, you’re still required to report your transactions on your tax return.
Crypto Miners May Be Subject to Different Tax Treatment
If you mine cryptocurrency as a business, you may be able to deduct your business expenses from your income for tax purposes. Additionally, the profit you make from selling mined cryptocurrencies counts as business income.
However, if you mine crypto as a hobby, you can’t claim these same deductions.
You Won’t Necessarily Owe Taxes For Every Taxable Event
Taxable events are transactions that you must report on your tax return. However, triggering taxable events does not necessarily mean you will owe taxes on those transactions.
For example, selling cryptocurrency is a taxable event. However, if you sold the virtual currency for less than you paid for it, you likely won’t owe any taxes on the sale. Instead, you’ll be able to deduct the capital loss from your taxes.
Failing to Report Crypto Trading
If you’ve never reported crypto transactions on your tax forms before, you may feel tempted not to report them this year. However, failing to report your crypto activities could leave you owing additional interest and tax penalties.
Knowing that you owe taxes for a specific capital asset and failing to report that asset or pay those taxes is considered tax evasion. Tax evasion is a criminal offense that could lead to criminal charges.
However, even unknowingly failing to pay your crypto taxes can lead to penalties and interest. If you face an IRS audit down the line, you’ll need to provide documentation of your cryptocurrency transactions. The IRS will then see if you failed to pay taxes and can charge you additional penalties and interest on top of the taxes you would have paid.
Generally, it’s best to report every virtual currency transaction you make on your taxes to avoid any penalties and interest.
How to Prepare For Tax Season
If you’ve just recently begun trading cryptocurrency, there are a few actions you can take to make filing your taxes easier down the line. Here are a few tips to help you prepare to pay taxes on your crypto.
If you read the information above, you know that if you had cryptocurrency transactions you may have a capital gain. Any time you sell virtual currency, use virtual currency to purchase other goods, receive virtual currency as income, or convert the virtual currency to another digital asset, you may have to pay taxes.
As a result, it’s best to track every cryptocurrency transaction in detail as soon as you make it. We recommend keeping a detailed spreadsheet with the following information:
- The date of the transaction
- The fair market value or cost basis of the capital asset on the date of the transaction
- The sale price in U.S. dollars
- The amount of the gain or loss
With TurboTax Premier you can import up to 4,000 cryptocurrency transactions directly from your crypto provider at once.
Use a Cryptocurrency Exchange
A cryptocurrency exchange is a business that allows you to trade digital currencies for other assets. Using this type of platform for your transactions can make it easier to track your activity come tax time. Most exchanges keep detailed records of all of your financial transactions through the platform, then allow you to download your activity as a CSV file for tax reasons. Check out our recommended exchanges in our Best Crypto Exchanges Guide.
Consider Working With a Professional
Working with a professional may ease some of your stress if your cryptocurrency transactions are complex. Hiring a tax professional can take the burden of your tax liability off of your shoulders and ensure that you accurately report all of your transactions and make the necessary tax payments.
We recommend hiring a professional who has experience with cryptocurrency or even one who owns virtual currency themselves. Working with a professional with this specific cryptocurrency expertise can allow you to breathe easily come tax season.
How to File Crypto Taxes with TurboTax
Filing your tax return with cryptocurrency taxes in mind may feel a little daunting or confusing. Thankfully, TurboTax makes the process of reporting cryptocurrency transactions on your tax returns a piece of cake.
You can follow these steps to add your crypto data into TurboTax and complete the tax return process.
Step1. Create a TurboTax Premier Account and Sign In
First, if you do not already have a TurboTax account, you’ll need to create one. TurboTax offers a few different account types, but we recommend TurboTax Premier for investors and anyone who completed cryptocurrency exchanges in the previous year.
Step 2. Answer Questions About Your Personal Information and Previous Tax Returns
Next, you’ll need to input information about your location, age, marital status, employment, and other personal details. You’ll also need to specify how you completed your taxes last year. You can import copies of your tax forms from the previous year into the TurboTax software or input this tax information manually.
Step 3. Input Financial Information
Eventually, TurboTax will take you to a page where you can input information about your financial picture. You’ll need to select any of the following criteria that applied to you in 2021:
- College expenses/tuition
- Vehicle registration fees
- Child-care expenses
- Owned rental property
- Donations to charity
- Bank account interest
- Medical expenses
- Sold stocks or investments
- Sold or traded cryptocurrency (be sure to select this option if you need to report your virtual currency)
Step 4. Report Wages & Income
Next, TurboTax will take you to a page where you can report any wages and income you earned in 2021. You’ll be able to select the investment type “Cryptocurrency” from a list of investment income.
Step 5. Import Crypto Gains and Losses
If you conducted your cryptocurrency transactions through a crypto exchange, you can import your tax information from that website. TurboTax will take you to a screen where you can select your crypto exchange. If your exchange is on this list, you can follow TurboTax’s instructions to import your information. With TurboTax Premier you can easily import up to 4,000 crypto transactions directly from your crypto exchange at once.
Step 6. Import Information Manually
Don’t see your crypto exchange on this list? In that case, you can select “Change how I enter my form” at the bottom of the page. Then select “Upload it from my computer.” You can then upload a CSV file containing your gain or loss information, if you have one.
Step 7. Report Cryptocurrency Income
The previous step is for reporting your capital gains or losses from selling or trading crypto. If you received digital assets as income, and you are an employee that income will be included on your W-2. If you are self-employed and you receive it for your services it will be included in income on your 1099-NEC. TurboTax will easily guide you through entering crypto you received as income.
Step 8. Report Any Other Income
Once you’ve finished reporting your cryptocurrency transactions, you can work on inputting your other income into the TurboTax platform and filing your tax returns. TurboTax will walk you through all of the steps to ensure you do not overlook any necessary reports or deductions.
If you have any questions or encounter any problems while reporting your crypto transactions, you can connect with a TurboTax Live Premier tax expert to get help along the way or they can fully do your taxes for you with TurboTax Live Full Service. With TurboTax Live Full Service, you’re matched to a tax expert who’s experienced in your tax situation — in this case paying taxes on crypto transactions.
Why Choose TurboTax?
TurboTax isn’t the only software that can help you pay taxes on crypto, but it’s one of the best. Here are a few reasons we recommend TurboTax to our Investor Junkie readers:
Filing your taxes may feel overwhelming, especially if you have not incorporated cryptocurrency into your filings before. It’s no secret that the IRS doesn’t make tax filing very easy. However, using the TurboTax platform can provide you with a simple, straightforward experience while ensuring that you report all of the necessary income and expenses on your forms.
TurboTax can allow you to file your taxes confidently without fearing that you have overlooked any tax deductions or credits, or will face a tax bill down the line. If you have cryptocurrency transactions it will help you easily and accurately report your gains and losses from your sales transactions.
TurboTax can help you identify all of the deductions and credits you are eligible for based on your entries. That could decrease your taxes and potentially lead to a bigger refund check.
When you e-file your taxes with direct deposit through TurboTax you can receive your refund check faster than you would mailing in tax documents.
Live Tax Advice
Many people believe that filing through software like TurboTax means they’re basically on their own throughout the process. However, TurboTax always has tax experts available to help you through the reporting process. Even better, a TurboTax Live expert can review your tax return before submitting it to the IRS. The tax pro can ensure accuracy or even do your taxes for you from start to finish with TurboTax Live Full Service.
Buying, selling, and trading cryptocurrency can be an incredibly profitable venture. However, whether you choose to file with TurboTax or complete your own tax filing, accurately reporting your cryptocurrency transactions on your tax documents is essential.
Reading through the information above can ensure that you know every transaction that could create a taxable event and that you report these transactions properly on your taxes. But if you’re still unsure, talking with a TurboTax Live expert can help.