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Bitcoin and cryptocurrency tax 2021: Tips and guide

If you’re new to the cryptocurrency game, you might be surprised to learn that — tax-wise — cryptocurrency isn’t treated like cash, but as property. Similar to stocks, the value of cryptocurrency can increase or decrease over time.

“With cash, if you have a $10 bill at the beginning of the year, barring slight changes for inflation or cost of living, it will still be worth $10 at the end of the year," said Helena Swyter, a certified public accountant and owner of Sweeter CPA in Chicago. "But if you purchased $10 worth of cryptocurrency, it could be worth a lot more or a lot less than that in a year.”

Those fluctuations become gains or losses once you sell the cryptocurrency, at which point they can be taxable, and the IRS is going to want to know about them on Form 1040, your federal income tax return form. In December, the IRS added this question near the top of the form: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The aim was to increase people’s awareness that cryptocurrency is taxable once it’s sold or exchanged.

“There is an increasing awareness about how cryptocurrency is taxed in recent years,” said Lisa Greene-Lewis, a CPA and tax expert with TurboTax, but the IRS has decided to make it a priority in the last couple of years.

A mock Bitcoin is displayed on a table in an illustration picture taken in Berlin January 7, 2014. European banking regulators warn consumers against hacking and other risks associated with online currencies like Bitcoin. It follows similar advisories from the Bank of France and the Chinese central bank - and adds pressure to calls for the sector to be regulated. REUTERS/Pawel Kopczynski (GERMANY - Tags: BUSINESS)
A mock Bitcoin is displayed on a table in an illustration picture taken in Berlin January 7, 2014. REUTERS/Pawel Kopczynski (Pawel Kopczynski / reuters)

How to track crypto transactions

Because you have to report your cryptocurrency gains and losses to the IRS, you need a good system to keep track of them. First, check with the brokerage or exchange you use to buy or sell cryptocurrency to see if it has tracking capabilities you can use or access, Swyter said. If not, use an app, tax reporting software, or a spreadsheet to track the information on your own, she said.

Here’s what you need to track:

  • How much in dollars you spent to buy the cryptocurrency

  • The date you bought or received the cryptocurrency

  • The date you sold or exchanged the cryptocurrency

  • How much the coins were worth in dollars on the date you sold them

If you sell cryptocurrency coins for less than what you paid for them, that’s a loss. You don’t pay taxes on the losses. You can offset cryptocurrency capital gains with losses of up to $3,000, according to the IRS. If you have more than that amount in losses, you can carry it forward to future years.

“But if you later sold cryptocurrency for more than its purchase price, that’s a taxable gain,” Swyter said. “This gain is taxed at short- or long-term capital gains rates, depending on how long you owned it.”

That’s why it’s important to know the dates you bought and sold your cryptocurrency. Some cryptocurrency exchanges will send you a 1099-B or a 1099-K form near the end of January. The 1099-B shows your gains or losses from selling cryptocurrency, while the 1099-K shows your proceeds. A 1099-B is more useful for figuring out how much you owe for taxes, but not every exchange sends these out. If they do, they may only send to certain people who made many or larger transactions. So it’s a good idea to keep your own records.

How to report crypto gains and losses

(Photo: Getty Creative)
(Photo: Getty Creative) (Travis Wolfe / EyeEm via Getty Images)

To figure out a loss or gain, look at how much you paid for the cryptocurrency — including fees — and subtract it from the selling price. If the number is negative, that’s a loss. If it’s positive, that’s a profit.

If you owned the cryptocurrency for one year or less before you sold or exchanged it, it’s taxed as a short-term gain or loss, which is taxed at the ordinary income tax rate. If you held it for a year or more before you sold or exchanged it, it’s calculated as a long-term capital gain or loss. Those are taxed at the more favorable long-term capital gains tax rate, based on your tax bracket.

Many people’s experiences with cryptocurrency is through coins they’ve bought that are held in a brokerage account, Swyter said. But if you received other types of income in cryptocurrency, you need to report those, too.

“If you earned interest from a cryptocurrency bank that needs to be converted to U.S. dollars when you receive it, report it the same way you would from a traditional bank,” Swyter said. The same goes if someone paid you for a service in cryptocurrency, she added.

Once you’ve calculated your gains and losses — and determined whether they were short- or long-term capital gains — you’re ready to fill out the required tax forms.

If you’re reporting both short-and long-term gains and losses, fill out tax Form 8949. After that, you should also fill out and file a regular income tax form, Form 1040 (Schedule D), which includes a space to summarize your transactions from Form 8949. If you’ve done a good job with your record keeping, your work should be done.

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