Cryptocurrency isn’t new. For years now, we’ve seen more and more clients needing help determining their tax liability on the sale and exchange of crypto. Like stocks, bonds, gold and silver, the IRS considers crypto property and treats it as such. Individuals trading in this unique currency must file capital gains and losses just as you would on the sale and exchange of stocks.
You don’t owe purchase taxes if you bought crypto during the year without selling any. When you elect to sell the currency, tax liabilities are recognized. The sale of cryptocurrency is determined based on its exchange for goods, other currency or services. For example, if you choose to buy a product using crypto, you must pay taxes on the crypto as the IRS considers it a property sale.
You’ll need to keep track of all these transactions throughout the year. The sale of crypto and purchasing other products using crypto as a currency determines your tax liability. Only if you used bought, sold or exchanged crypto as an investment through a non-taxable tax-deferred account are you free from tax liability.
Crypto tax-filing forms
Include the appropriate forms with your tax return when accounting for crypto taxes. Even if crypto exchanges or brokers fail to provide a Form 1099, you must report your transactions and income. The IRS must know when and how much the cryptocurrency purchase was for. They’ll want to also know when and for how much you sold it when you disposed of the property. Trading brokers and exchanges provide this information on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Depending on how you received the crypto – in exchange for services, as a bonus or reward, through a purchase, etc. – multiple forms may be required including Form 1040, Schedule D, Form 8949, Schedule C, or Schedule SE.
Failing to report your transactions or earnings can cost you in the form of fines, penalties and fees from the IRS.
A Form 1040 is the primary form by which your income taxes are reported. Within it resides additional areas to report other income, credits, deductions and information the IRS would need to know to calculate your total tax liability. In 2020, the IRS added a top-line question on 1040: “At any time during 2022, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” to prompt anyone with crypto activity to answer.
Most people use Form 1040, Schedule D to report capital gains and losses from the sale or trade of specific property throughout the tax year. Capital assets include stocks, bonds, mutual funds, homes and cryptocurrency.
You file Form 8949 with your Schedule D when you must report additional information for the sale or exchange of capital assets like stocks, bonds, real estate and crypto. You can file as many Forms 8949 as needed to report all necessary transactions. If your crypto platform or exchange fails to provide you with a 1099-B, Form 8949 is required.
Once every transaction is accounted for on individual Form 8949s, the total value requires a Schedule D.
If you are an independent contractor or have a side hustle and were paid in cryptocurrency, you will need to collect a Form 1099-MISC for nonemployee compensation from each person or entity that paid you throughout the tax year. If you don’t receive a Form 1099-MISC but did receive payment in the form of crypto, report it! Failure to do so can lead to fines, fees and penalties.
Cryptocurrency gains and losses
Capital gains and losses fall into two classes: long-term and short-term. There’s a big difference in tax terms of what to expect.
- Short-term capital gains and losses resulting from the sale of property held for one year or less. These gains are typically taxed as ordinary income at a rate as high as 37% in 2022.
- Long-term capital gains and losses come from the sale of property held for more than one year and are typically taxed at preferential long-term capital gains rates of 0%, 15%, or 20% for 2022.
Give Us a Call!
Cryptocurrency may be a newer currency, but the old tax rules still apply. Don’t risk prompting an audit by underreporting or failing to report your crypto transactions – purchases, sales and exchanges. Let our tax experts at Tax Time CPAs help. We are a full-service tax firm here to protect Colorado clients from the crazy confusion crypto can bring. Focus on you; we will focus on the IRS.