Reporting Cryptocurrency

a pile of coins with various cryptocurrency logos engraved into them

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 Overview

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.

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If held for 1 year or less before selling, the profits are typically short-term capital gains, which are taxed at your ordinary income rate.

If you held the cryptocurrency for more than 1 year, profits are typically long-term capital gains, subject to long-term capital gains tax rates.
A graphic of a digital coin being traded


You can trade one type of cryptocurrency for another, but each trade needs to be reported (just like a stock). For example, say you paid $200 for Bitcoin that has increased to a value of $1,000. If you decide to exchange it for $1,000 worth of Ethereum, you have to recognize a $800 capital gain when you make the exchange.
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Cryptocurrency mining is a way to earn passive income. You'd buy software that competes to validate blockchain transactions and create new coins. The first computer to complete the task receives the coins and the process begins again.

If you earn cryptocurrency this way, you should receive a Form 1099-NEC at the FMV of the cryptocurrency on the day you received it, but you need to report this income even if you do not receive a 1099 form.
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If you have massive gains on your cryptocurrency investments, one way to lower your taxes is to donate or gift cryptocurrency to a charitable organization. The IRS says this is NOT a taxable event, so you will not recognize any gains when gifting or donating appreciated crypto assets, but you will get a deduction for FMV at the time of the donation.
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Receiving as a Payment

If you or your businesses accepts cryptocurrency payments in exchange for goods or services, the the dollar value you received is equal to the fair market value of the cryptocurrency on the day you received it.
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Holding Interest

When you do this, you are not actually purchasing cryptocurrency. Instead, you purchase stock in a company with a financial stake in the future of cryptocurrency or blockchain technology. This is reported on Schedule D with the other stock purchase/sales.

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.

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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.

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