As use of cryptocurrency increases, so do IRS reporting requirements. Whether you dabbled with investing in it, received a small amount as a payment, or you are an experienced currency trader, it’s important to understand cryptocurrency tax implications.
Cryptocurrency is a type of digital asset. Once you purchase some, you can use it like cash to buy goods and services, or you can use it as an investment and trade it like a stock. Once you purchase it, all further activity is done without the involvement of banks, financial institutions, or other central authorities, which is one of the reasons people both get excited or nervous about participating in crypto transactions.
Often, people begin their cryptocurrency activity through a platform dealing with only crypto such as Coinbase, or via a stock trading platform like Robinhood. There are thousands of forms of cryptocurrency, but a few you might have heard of include Bitcoin, Litecoin, and Ethereum.
Cryptocurrency Tax Reporting
Cryptocurrency transactions are encrypted with specialized computer code and recorded on a blockchain — which is a public, digital ledger. Each entry on this ledger is reviewed and approved by all network members (see mining below). For reporting purposes, the IRS classifies cryptocurrency as property instead of currency. Similar to stocks, cryptocurrency activity is reported on Schedule D by listing capital gains and losses.
This year, all taxpayers are required to report any dealings they’ve had with cryptocurrency. This includes buying, selling, exchanging, “mining”, donating, receiving, and holding interest in a cryptocurrency trust or fund. Here’s an overview of each of these activities.
If you bought/sold/exchanged cryptocurrency through a verified platform, such as Coinbase, you should receive a 1099-MISC that includes these transactions. If you do not receive a 1099-MISC, you can usually download a transaction report from your cryptocurrency exchange platform.
Be aware: the IRS is on the lookout for any missing crypto transactions. In 2020 they sent over 10,000 letters to individuals who failed to report cryptocurrency activity requiring them to both pay tax and file an amended return. This year, you can expect an increase in penalties and interest for failing to report this activity. Click here to read about more 2021 Need-To-Know Tax Info.
Earl Blackmon, CPA
Avizo Group offers Wealth Management for clients who would like assistance in investing, saving, and portfolio diversification. This is an area of need for many of our clients who want to invest but need someone they know and trust to help them. Earl Blackmon holds a Series 7 and Series 66 license.