If you are one of the more than 10% of Americans who traded cryptocurrency in 2021, you may be wondering how that will impact your 2021 tax return. While the rules and tax treatment continue to evolve, here are some key guidelines for this tax season.
How is crypto treated?
Cryptocurrency is considered property for tax purposes, so it may be subject to capital gains when traded and/or sold. You aren’t taxed for simply ‘owning’ crypto; rather, the taxable events occur when you trade and/or sell.
In some ways, crypto is treated similarly to stock. The cost basis is the price you purchase the coin at, and the difference between the purchase price and selling price is your gain or loss. You have the option to choose a different cost basis (different buy points) to change the gain or loss on the sale or trade. This impacts your current gain or loss, and it will also impact future gains and losses. This is why it is important to plan with your tax advisor for optimal tax savings.
However, cryptocurrency is also treated differently from stock. Trading one cryptocurrency for another creates a taxable event despite never selling to USD, whereas with stock the taxable event is when you sell the stock for USD. For example, if you own Apple stock and wish to trade it for Microsoft, you would sell the Apple stock for USD and then purchase the Microsoft stock. This creates a taxable event because there is a sale and a purchase of new stock. With crypto, one coin can be traded with another without ever transferring to USD but still creating the same taxable event.
When and how do you have to report it?
For any trading or selling activity during 2021, it must be reported on your 2021 tax return.
As you can imagine, the more trades that occur, the more complex it becomes to track and identify the tax impact. Regulated crypto platforms, like Coinbase (one example), track activity and provide an Excel spreadsheet for crypto owners to download and give their CPA for tax preparation.
For the 2021 tax year, the ownness is on the taxpayer to download the proper documentation from the crypto platforms they are on and provide that to their tax preparer.
While the tax code currently doesn’t require cryptocurrency exchanges to report taxpayer information to the IRS and their customers, that’s coming. Beginning with the 2023 tax year, crypto exchanges will be required to collect taxpayer identifying information in order to issue a 1099 at the end of the tax year.
So, what does all of this mean for you?
You should be collecting any documentation of trades you made throughout 2021. Your tax preparer will need to know about all coins purchased, traded, and sold as well as the associated values.
Cryptocurrency is taxed as long-term (0%/15%/20%) or short-term gains (ordinary income tax rate).
If you have questions about any of your cryptocurrency activity during 2021 and the impact that will have on your individual tax return, we are here to help. You can reach us at (614) 456-7222 or tax@harpercpasplus.com.
