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Crypto and Taxes: 7 Important Questions and Answers

By Andrew Leonatti on February 01, 2022

Surprise, surprise, it's tax time again. There's nothing better than having to gather piles of paperwork and getting confused by needlessly complex government forms. Even more exciting: if you make any errors, you may have to pay penalties!

And if you are one of the new arrivals on the cryptocurrency scene, there are steps you will need to take to account for 2021's crypto gains and losses. As cryptocurrencies like Bitcoin and Ethereum become more popular, they get more attention from the IRS. Below are some of the most common issues that you will need to think through when completing your 2021 tax return.

How Does the IRS View Cryptocurrency?

While we refer to Bitcoin, Ethereum, and even Dogecoin as currencies (also known as "money"), the IRS views cryptocurrency holdings as property. That means the government treats crypto purchases the same as stock purchases, so the IRS is on the lookout for your cryptocurrency transactions, not merely buying and holding crypto.

What if I Bought Crypto With Cash in 2021?

To build on the point above, if all you did in 2021 was buy cryptocurrency with U.S. dollars, you will not be on the hook for anything. This year's 1040 federal income tax return will ask the question: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?"

However, Thomson Reuters tax consultant Shaun Hunley says that "you can check 'no' on that question," if all you did was buy and hold crypto. When you will need to report crypto transactions is when you sell it, trade it for another cryptocurrency, or use it to pay for something.

Do I Have To Report Selling Crypto?

It is when you sell cryptocurrencies that the IRS will come calling, meaning you will need to report those trades. That is because, like stock sales, you will owe taxes on your capital gains from the sale. You owe capital gains taxes any time you sell a taxable asset for more than you paid for it. Questions about whether you will have to pay a long-term or short-term capital gains rate are best reserved for your accountant or other tax professionals.

Do I Have To Report Currencies Other Than Bitcoin?

While Bitcoin is by far the most popular cryptocurrency out there, there are thousands of other "altcoins" floating around in internet land. The IRS treats all of these currencies the same.

Can I Deduct Crypto Losses From My 2021 Income?

Just like you have to pay taxes on capital gains from cryptocurrency sales, you can deduct up to $3,000 in losses when you sell your digital cheddar for less than you paid for it.

Will I Owe State Taxes on My Crypto Gains?

It would be generous to refer to the state-based guidance on cryptocurrency taxes as a "patchwork." Most state laws do not grapple with cryptocurrency yet. If you pay state income tax on capital gains, however, you should prepare to also pay it on your crypto transactions.

Can Someone Help Me?

Yes, and you should strongly consider working with a tax professional or attorney who understands cryptocurrencies. Because cryptocurrency exchanges do not have to send 1099-b forms documenting your transactions, the burden falls on you to keep track of everything. That includes keeping receipts for when you used cryptocurrency to pay for goods and services. Being honest and keeping good records should be essential components of your tax plan for this year.

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