Cryptocurrency Taxes for 2021

Taxes Owed on Our Cryptocurrency Profits

I want to preface this article with the fact that I’m in no way, shape, or form offering tax advice. I’m not a CPA. I have zero formal accounting experience. I’m just a guy on the internet.

My CPA is actually this dude, and he’s the man.

With that being said, I’ve been doing some research online as it relates to how cryptocurrency will be taxed for 2021 and I wanted to share what I’ve learned. Not only because I think it’s important to keep all of this in the back of your head, but also as a major heads-up for when you begin to execute upon your “exit strategy” in 2022 or beyond.

To learn more about cryptocurrency straight from the source, here’s a link to the IRS’ website with more information.

Considerations for 2021 Tax Season

Keep these 7 consideration in the back of your head when filing your taxes this year.

1. You will be asked whether you own or used crypto in 2021

Not sure who you will be using to prepare and file your taxes, but historically speaking I’ve used TurboTax — and for a few years now they’ve been asking me if I bought, sold, or used crypto during the taxable year.

Despite if you’ve seen this question asked in the past or not, it will be asked this year. Near the top of Form 1040 keep an eye out for a question asking “At any time during 2021, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

1. No 1099? You still have to pay

If you’re buying and selling stocks, you’re likely very familiar with Form 1099-B. It’s a form delivered to you by your online broker detailing your profits or losses for the calendar year — pretty much telling you what you owe taxes on.

Considering how new some cryptocurrency exchanges are, you might not receive a form like this. Some exchanges offer forms for you to download yourself, but may not send it to you directly. Be sure to check if there’s a tab called ‘Finance Center’ or ‘Tax Documents’ anywhere in your account settings.

Unfortunately, the lack of a 1099-B won’t let you escape any tax liability — you’ll still have to report your gains and pay taxes on them.

1. Simply using crypto exposes you to a potential tax liability

Any time you exchange virtual currency (crypto) for real currency, goods or services, you may create a tax liability. You’ll create a liability if the price you realize for your cryptocurrency — the value of the good or real currency you receive — is great than your cost basis on the cryptocurrency.

Long story short, if you get more value than you put into the cryptocurrency, you’ve likely got yourself a tax liability. It’s also important to note that this is not a transaction tax — it’s a capital gains tax.

1. Gains on your crypto trading are treated like regular capital gains

Moving right along here — you’ve realized a gain on a profitable trade or purchase, now it’s time to think about how the profit is recognized by the IRS. The IRS generally treats gains on cryptocurrency the same way it treats any other kind of capital gain.

You’ll pay ordinary tax rates on short-term capital gains (up to 37%) for assets held less than a year. For assets held longer than a year, you’ll pay long-term capital gains tax (0, 15, or 20%).

Of course — be sure to track if you had losses as well. These can be used to offset gains from other cryptocurrencies, stocks, etc.

1. Some crypto miners may be treated differently from others

Perhaps you found yourself mining cryptocurrency in 2021. If so, you might be able to deduct your expenses, as a typical business would. You must be running a business to qualify — you can’t operate your mining rig as a hobby and enjoy the same deductions as an actual business.

The good news is that creating a business costs less than $400 in most states, but can potentially net you a lot more than $400 in tax savings.

1. Gifting someone crypto is treated the same as any other gift

If you’ve given cryptocurrency to someone, your gift is treated the same way as any similar gift would be. It’s subject to the gift tax if it’s over $15,000 in 2021.

1. Inherited crypto is treated like any other inherited asset

Inherited cryptocurrency is treated the same as any other inherited capital asset passed from one generation to another. They may be subject to ‘estate taxes’ if the estate exceeds a certain threshold ($12 million).

Like stocks, cryptocurrencies enjoy a stepped-up cost basis to the fair value on the day of death — so generally cryptocurrency is treated like a typical capital asset.

Conclusion

Sweet and simple reading for your Friday — hopefully it helped! If you know someone who bought, sold, transacted — anything, with cryptocurrency in 2021 consider sharing this with them. Have a great rest of your Friday!

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

If interested in learning more, this post was based on the helpful research of Bankrate.