Taxes FAQ

HOW IS CRYPTOCURRENCY TAXED?

In 2014, the IRS issued Notice 2014-21, and clarified that virtual currency is treated as property for tax purposes. This means that cryptocurrency is taxed as a capital asset. As a result, persons transacting in cryptocurrency must be able to track each taxable event, and its corresponding cost basis and gain/loss detail. 

What Are Capital Gains and Losses? 

When a capital asset is sold the difference between the adjusted basis and the amount realized from the sale is a capital gain or loss. A capital gain will result when the asset is sold for more than the basis. A capital loss will result when the asset is sold for less than the basis. In order to accurately report capital gains and losses, taxpayers must classify whether they’re short-term or long-term. 

Generally, if an asset is held longer than one year before it’s sold or exchanged, then it’s a long-term capital gain or loss. If the capital asset is held less than a year it is a short-term gain or loss. 

The classification of a long-term capital gain versus a short-term capital gain is important; it impacts the applicable tax rates that apply. 

Where Do You Report Cryptocurrency Gains and Losses? 

The transactional details of your capital gains and losses are reported on Form 8949. Form 8949 is utilized to complete Schedule D of Form 1040. 

Beginning in 2020, the IRS added a new question to Form 1040 that asks taxpayers “[a]t any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

mceclip1.png

If a taxpayer answers “Yes” to the new question, the IRS will look to see if the taxpayer filed a completed Schedule D—including a Form 8949—for the capital gain and/or loss information for digital asset transactions. 

mceclip2.png

It’s important to accurately report both capital gains and losses. 

Similar to the sale of stock,  pursuant to Section 1211 of the Internal Revenue Code, there is tax relief in the form of a deduction for losses on capital assets. If taxpayers had net capital losses on their cryptocurrency for the year, they may be eligible for an increased tax refund. 

Failing to properly report cryptocurrency gain, loss and/or income can lead to penalties and interest during an IRS audit. 

WHAT CRYPTO TRANSACTIONS ARE TAXABLE EVENTS?

Cryptocurrency is considered a capital asset subject to capital gains tax. A taxable event will arise when a capital asset is sold or exchanged. Determining what transactions are considered taxable events for cryptocurrency can be complex. 

The following are examples of transactions that would be considered taxable events:

  • Selling your cryptocurrency for fiat money such as USD
  • Exchanging your cryptocurrency for another type of cryptocurrency or digital asset 
  • Paying for goods or services with cryptocurrency 
  • Receiving compensation in cryptocurrency 
  • Earning staking rewards in cryptocurrency 
  • Receiving an airdrop in cryptocurrency 

What Isn’t a Taxable Event? 

It’s also important to understand what isn’t taxable. 

The following are the most common types of scenarios that aren’t taxable events:

  • Purchasing cryptocurrency with fiat 
  • Transferring cryptocurrency from one of your personal wallets to another personal wallets 
  • Making donations of crypto to a registered charitable or non-profit organization
  • Gifting crypto up to $15,000 per donee or recipient 

The IRS issued Notice 2014-21 to help guide individuals and businesses on the corresponding tax treatment involved when transacting in cryptocurrency. They also published Virtual Currency FAQ’s to provide further clarification on how cryptocurrency is treated for tax purposes, and guidance for individuals transacting in cryptocurrency. 

WHAT IS FORM 8949?

Form 8949, Sales and Other Dispositions of Capital Assets, is used to report sales and exchanges of capital assets. When you sell or trade cryptocurrency, you’re required by the IRS to report the transactional details, including the capital gain or loss, on Form 8949. 

mceclip3.png

Form 8949 requires you to track and report the following for each of your cryptocurrency’s taxable events:

  • Details of the cryptocurrency
  • Date of acquisition
  • Date of sale
  • Proceeds
  • Cost basis 
  • Gain or loss 
  • Long-term gain versus short-term gain 

When you sell or trade stock or equities in a calendar year, you receive a Form 1099-B from the brokerage firm the following February. Form 1099-B contains the information listed above and must be included on Form 8949. 

However, when you sell or trade cryptocurrency, you can’t necessarily rely on the receipt of Form 1099-B; currently, not all cryptocurrency exchanges and platforms issue Forms 1099-B.    

As a result, you must make sure you’re tracking your crypto disposition activity. The TaxBit Consumer tools allow users to link their exchange and crypto platform accounts, pull in transactional details, and will generate a Form 8949 for you. 

WHAT IS FORM 1099-MISC?

Who Receives a Form 1099-MISC?

If you’ve earned $600 or more in crypto interest, rewards, staking, or bonuses in a taxable year, you should receive Form 1099-MISC, Miscellaneous Income, from the crypto exchange or platform by January 31st of the following year. Form 1099-MISC is intended to report miscellaneous income paid to the IRS. The crypto exchange or platform also sends a copy of Form 1099-MISC to the IRS. 

An official IRS copy of the 1099-MISC looks like this: 

mceclip5.png

Why Is Form 1099-MISC Important? 

Form 1099-MISC is directly related to the preparation of Form 1040. You’re responsible for including the information in Form 1099-MISC on Form 1040 when you file your tax return. When the IRS receives the 1099-MISC filed by the crypto exchange or platform, they’ll check it against the corresponding Form 1040 to make sure all income is properly reported.  

If the crypto exchange or platform doesn’t send you a Form 1099-MISC, you can utilize the TaxBit Consumer Income Report discussed below. 

WHAT IS A TAXBIT CONSUMER INCOME REPORT?

The TaxBit Consumer Income Report will list all the income you’ve generated in connection with crypto yield products, staking, rewards, and bonuses for that calendar year. 

In order to download a comprehensive Consumer Income Report you can use to prepare your personal tax returns, you must make sure you’ve linked all of your exchange and platform accounts to your TaxBit Consumer tool. You’ll also need to make sure that all crypto transactions have been imported as well. 

If those actions are completed,  you will be able to download a Consumer Income Report at the end of the year. It will summarize the various income received across exchanges and platforms. Then, you can easily add that information to your own tax return.  

WHAT REGULATIONS ARE IN THE NEW INFRASTRUCTURE BILL?

The Infrastructure Investment and Jobs Act, more commonly known as the Infrastructure Bill, passed in the US House of Representatives late in the evening on Friday, November 5, 2021, by a vote of 228-206; it ratified the Senate amendment passed on August 10, 2021. 

President Biden signed the bill into law on Monday, November 15, 2021. 

It will have far-reaching effects on the crypto industry, but the more immediate impact for you is understanding that crypto exchanges and platforms will have increased tax and information reporting. Currently, the effective date for enhanced information reporting is 2023—Forms 1099 will be sent to users in early 2024. 

In order for an exchange to be able to provide you and the IRS with complete Forms 1099, they need to collect personal information you might not have provided previously. The information includes: name, address, and Tax ID. You also want to make sure that the Forms 1099 you receive match both your Form 8949 and Form 1040.