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Cryptocurrency has been dominating the news for a while now. Digital currencies like Bitcoin, Litecoin, Dogecoin, and Ethereum have been gaining steam and legitimacy as companies are now accepting and even investing in them.
Digital currency wallets such as Coinbase are becoming more popular, making it easier than ever to invest in cryptocurrency. From 2010 to 2021, the value of one Bitcoin jumped from $.08 per coin to over $60,000 per coin (though its price fluctuates regularly). But despite its high volatility, many people are deciding to hop on the crypto investment bandwagon in hopes of turning a profit.
If you bought any cryptocurrency lately, you might be wondering how to report it on your taxes. You’re not alone — reporting crypto on your taxes is new for everyone, so it makes sense if it sounds confusing.
Don’t worry! We’re here to walk you through how to report cryptocurrency on your taxes so you can rest easy knowing your return is accurate and you’re not at risk of being audited or owing more money.
Reporting crypto on your tax form
Any time you make or lose money on your investments, you need to report it on your taxes using Schedule D.
In the past, many people who held blockchain technology and cryptocurrency may not have reported it. But ever since 2020, the IRS has added a question about crypto to page one of Form 1040 tax reporting purposes. Under the section where you put your name, address, and other personal information, it says, “At any time during the tax year, did you receive, sell, send, exchange, or otherwise dispose of any financial interest in any virtual currency?”
You only need to check “Yes” if you made any crypto transactions during the tax year; if you just purchased crypto with real currency or held cryptocurrency but didn’t buy or sell it, you can mark “No.”
New for tax year 2021: The IRS is requiring all taxpayers to answer “Yes” or “No” to the virtual currency question in order to e-file their return this year, so don’t skip this question!
Crypto tax on capital gains
If you invested in cryptocurrency by buying and selling it, you would report all your capital gains and losses on your taxes using Schedule D, an attachment for Form 1040.
Remember that if you made money on crypto exchanges but held it for one year or less, then it’s considered a short-term capital gain and it would be taxed as income. Your federal tax rate would range from 10-37 percent depending on your tax bracket.
If you held and sold crypto for more than one year, then it would be taxed as a long-term capital gain. Those capital gains tax rates are 0, 15, or 20 percent depending on your taxable income that year.
If you happen to lose money on your investment, you can use it against your other gains and income. There is a $3,000 yearly limit, but you can carry the rest over to subsequent years when you file.
This is a NET capital loss of the $3,000 limit. For example, if you had $10,000 in other capital gains and $15,000 in losses from crypto, you’d actually be able to claim $13,000 in capital losses on your return. By netting $10,000 of your loss against your capital gains, your remaining loss ends up being $5,000. You could deduct the yearly maximum of $3,000, and the remaining $2,000 would be carried forward for you to deduct next year.
If you sold any Bitcoin last year, we also have a handy Bitcoin tax calculator to help you estimate your cryptocurrency taxes.
Income and donations
Let’s say someone paid you with cryptocurrency for performing a job — you must report that for tax purposes as well. If you are paid as an employee, then you need to pay ordinary income taxes. If you are self-employed, you need to pay ordinary income taxes along with self-employment taxes. If you mine crypto, you’ll need to record it and pay any taxable income.
You may have donated your cryptocurrency to charity. As long as you gave your actual virtual currency to eligible charities and didn’t convert it to dollars, then you could potentially qualify for reduced tax liability.
For more information on reporting virtual currency, the IRS put out Notice 2014–21, which gives detailed information on all different scenarios with crypto and how you would report them on your tax return. You can also check out the official IRS webpage on virtual currency for more helpful publications.