Understanding Cryptocurrency and Taxes
As cryptocurrency continues to dominate the headlines and become a cash alternative, the IRS is turning its sights on crypto investors.
If you’re a crypto investor, what does this mean to you and your taxes? Here’s what you need to know about what you may need to report to the IRS and how you can begin planning for your 2021 taxes.
What is Cryptocurrency?
Cryptocurrency is a virtual currency that uses blockchain to secure and verify transactions. As a peer-to-peer unofficial currency, it has no central bank overseeing the supply of currency available in the market. A few popular cryptocurrencies include Bitcoin, Ethereum, Litecoin, and Tether.
When to Report Cryptocurrency Trades on Your Tax Return
For tax purposes, the IRS considers cryptocurrency holdings as “property” rather than actual currency, which means these capital gains and losses must be reported on Schedule D and Form 8949. Like other capital gains and losses, your gain may be short-term or long-term, depending on how long you held the cryptocurrency before selling or exchanging it.
If you owned the cryptocurrency for less than a year before spending or selling it, any profits are typically subject to short-term capital gains, which are taxed at your ordinary-income rate.
If you owned the cryptocurrency for more than one year, any profits are generally qualified as long-term capital gains, which are subject to long-term capital gains tax rates. Here are the 2022 tax rates for long-term capital gains.
| Filing Status | 0% | 15% | 20% |
| Single | Up to $41,675 | $41,676 to to $459,750 | Over $459,750 |
| Head of household | Up to $55,800 | $55,801 to $488,500 | Over $488,500 |
| Married filing jointly | Up to $83,350 | $83,351 to $517,200 | Over $517,200 |
| Married filing separately | Up to $41,675 | $41,676 to $258,600 | Over $258,600 |
Short-term capital gains are taxed as ordinary income. Taxpayers can use Form 8949 to reconcile capital gains and losses. Then, they must report them on your Form 1040 tax return using Schedule D.
You may also be hit with a tax liability from sending or exchanging cryptocurrency.
How to Prepare for Tax Season if You Own Crypto
The first step to getting through this tax season as a crypto investor is to contact a tax professional. To make this process easier, make sure to keep records of your crypto transitions throughout the year. Depending on which crypto platform you use, you may be able to export data and receive important tax documents.
Let US Tax Shield Help You Navigate Your Cryptocurrency Holdings this Tax Season
With cryptocurrency being relatively new and increasing in popularity, the IRS will no doubt enforce the tax code in the world of virtual currency. Our tax attorneys at US Tax Shield have helped numerous taxpayers navigate their cryptocurrency tax holdings. Contact US Tax Shield today for your free no-obligation consultation. We’ll save you the hassle and complexity of filing returns while maximizing your chances of getting a refund.
