Crypto & Taxes: Your Up-to-Date Crypto Tax Guide


what you need to know

  • Cryptocurrency prices grew substantially from December 2020 to December 2021, but have plummeted ever since.
  • Cryptocurrencies are considered property, which means that sales proceeds are treated as short- or long-term capital gains or losses.
  • The wash sale rules do not apply to cryptocurrencies, making them useful for tax loss collection.

cryptocurrency investors had a wild ride in the last two years. From December 20, 2020 to December 19, 2021, the price of bitcoin (BTC) increased 93% and ethereum (ETH) grew 495%.

But the good times ended in November 2021. Bitcoin and ethereum peaked earlier that month, and their collapse since then has been dramatic. From December 19, 2021 to December 18, 2022, bitcoin fell 67% and ethereum fell 70%.

Given that pattern and the currently depressed market prices of the currencies, it is likely that their customers who bought cryptocurrencies in the last two years and still hold their positions have unrealized losses in their portfolios. It is a good time to review tax rules and strategies for crypto investors to learn what, if anything, can be gained from the cryptocurrency crash.

How the IRS Views Crypto Gains and Losses

The IRS treats cryptocurrencies as property, so the same short-term gain-loss or long-term gain-loss rules apply to the sale of crypto assets that apply with other traditional capital assets, it says. Jesse Rodriguezmanager of Kaufman Rossin’s tax advisory group in Miami.

“It is based on the holding period and the tax rate depends on the taxpayer’s adjusted gross income and their marital status for filing purposes,” Rodríguez explains. “Short-term rates will be taxed at ordinary income rates and the long-term rate may be 15% or 20%, depending on the total adjusted gross income for the specific year.”

The additional tax on net investment income of 3.8% can also be applied, it adds.

Carlos Kolstad, a partner in the private, tax and corporate client teams of the international law firm Withers, adds a caveat for active traders. “In most cases, investors are not traders or dealers and therefore report all gains and losses as short-term (held less than 12 months) or long-term (held more than 12 months) capital gains or losses. 12 months), he explains. “Investors who trade regularly may qualify as a trader, in which case the gains and losses constitute ordinary income or ordinary losses.”

How to report cryptocurrency on your taxes

Tax forms for reporting crypto transactions should be familiar to security investors. EnglishVice President of Marketing at Ledgible, a cryptocurrency tax and accounting platform, says that taxes on cryptocurrency transactions are typically reported on Form 1040, Schedule D and Form 8949, which is used to report sales and trades of cryptocurrency assets. capital.

Investors may also receive a Form 1099-B from the exchanges they use and, in the future, could receive a specialized Form 1099 for digital assets, tentatively called Form 1099-DA, from the cryptocurrency exchanges they trade on.

tax complications

However, investing in crypto can add to the complexity of the filing because the IRS is very focused on the potential for tax evasion through the use of crypto assets, according to Kolstad. For example, she points out that on the first page of Form 1040, taxpayers must answer whether they have made crypto transactions for that tax year. Taxing specific transactions can also be tricky, Kolstad says.

“Cryptocurrency is classified as property for US tax purposes, so any transaction that involves the conversion of fiat currency, such as US dollars, into cryptocurrency, the exchange of one form of cryptocurrency for another, the exchange of cryptocurrencies for NFTs (non-fungible tokens), the sale of NFTs for crypto, and the conversion of crypto to fiat are separate taxable events,” he explains. “Investors must track their taxable income for US tax purposes to determine their taxable income in US dollars, not crypto, so many investors have large unrealized taxable losses.”

Tracking tax base and calculating gains and losses on crypto transactions can mean unexpected work for stock investors who are used to receiving itemized Forms 1099-Bs from their stock brokerage firms, Rodriguez says. Some cryptocurrency exchanges may provide a Form 1099-B, but the report may lack cost basis information if cryptocurrency holdings have moved between an offline storage device (a “cold wallet”) and the account. exchange.

Additionally, cryptocurrency users often have accounts on multiple cryptocurrency exchanges and have multiple self-custodial wallets in which they store their cryptocurrency and NFT HoldingsKolstad says. Transfers from one wallet to another are not taxable events, but the tax base on the transferred crypto must be tracked across multiple wallets. This can make determining the correct amount of taxable income difficult for investors who trade frequently.

That difficulty has spawned several crypto wallet and tax reporting software applications that provide portfolio reporting and trading and grassroots tracking. These programs, such as Ledgible and CoinLedger, among others, allow tax investors to link their accounts to the exchanges they use and their crypto wallets; built-in tracking and reporting helps with tax filing information.

“They do a pretty good job of summarizing profits and losses, and we definitely work hand-in-hand with a lot of these platforms,” Rodríguez says. “They are definitely a big part of the fiscal component.”

The basic reports could be improved in the near future and make tracking easier. According to Thomson Reuters and Ledgible, cryptographic reporting requirements under the November 2021 rule Investment in Infrastructure and Jobs Law (PL 117-58) will take effect on January 1, 2023 and will affect the US crypto industry. Key crypto-related provisions include:

  • The Act expands the reporting requirements for transactions involving more than $10,000 in cash to transactions involving digital assets.
  • The Act has the potential to affect the information that companies collect and report to the IRS regarding crypto transactions. While 1099 reports are coming to the digital asset space, the Securities and Exchange Commission and IRS could get more concrete regulation.
  • The bill requires crypto exchanges to submit Form 1099-B to report an annual gain or loss on a given crypto asset. The new rules will apply to account statements issued after December 31, 2023, so informational statements issued in 2024 will cover 2023 transactions.

Expenses, earnings, mining and staking

Some clients may have extended their involvement in cryptocurrency beyond buying and selling. They could be transacting with it, collecting money from it, mining it, or earning interest on its properties. Transactions initiated by exchanges, such as airdrops, hard forks, and colorfully named soft forks, can also have tax implications for investors.