With crypto’s quick rise to fame, old and new traders alike have been forced to adapt to a totally new way of transacting. This has left crypto enthusiasts with concerns regarding how to report gains related to cryptocurrency. and needing answers to questions like “are crypto gains taxable?”
And you aren’t alone; even the IRS is having difficulty adapting to the new financial systems because of crypto’s complicated and decentralized nature. Regardless, this has not stopped their efforts to enforce new regulations or prevented them from seizing assets from those who aren’t following the proper protocols. Because of this, it’s crucial you make an effort to know the laws in this area.
In this article, we’ll cover tax-related crypto topics that you should know before you start trading. Topics like:
- What you might be asked on your tax forms this year
- How reporting your cryptocurrency works
- How to tax gifts of cryptocurrency
- And more
So, are crypto gains taxable? Let’s jump straight in.
First Things First: Are Crypto Gains Taxable?
The short answer to this question is yes, sort of. The IRS now classifies cryptocurrency as commodities, a type of taxable item that can be exchanged with other goods of the same type. Because of this, gains that you get from selling or trading cryptocurrency are subject to commodity tax laws. Essentially, short-term gains are taxed normally while long-term gains are taxed at 20 percent.
How Are Crypto Gains Taxed?
Crypto gains are taxed in a way where you only account for what you lose or gain. This prevents you from being double-taxed on income you’ve already got. This sounds confusing, so let’s break it down:
Let’s say, for example, that you buy $1,000 worth of the cryptocurrency, DYP (a completely fake currency). DYP’s worth then goes up over the next few months and you’re able to sell what you bought for $1,500. At the end of the year, you would need to report and pay taxes on the $500 you gained.
Now, let’s pretend that you chose not to sell your DYP crypto and held onto it in hopes that the market would continue to climb. Unfortunately, however, DYP’s worth plummets and your $1,000 in crypto is now only worth $500. Not wanting to lose anymore, you go ahead and sell and take a $500 loss. When you do your taxes, you may now deduct that lost $500 from your taxable income!
Buying cryptocurrency on its own is not a taxable event. In order to be taxed, you must first perform a taxable event such as selling your crypto.
What Questions Can I Expect to Be Asked Regarding My Crypto?
Everyone knows the IRS asks tons of questions on their tax forms, so it seems inevitable that they would have added a few this year regarding your crypto holdings– and they have.
The biggest question you’ll be asked is where you owned or used cryptocurrency. You’ll notice this is an extremely straightforward question; either you did or you didn’t, right? This tells the IRS that you may have some additional income either this year or in the coming years from the crypto you currently hold.
The exact question is phrased like this: “At any time during 2022, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
There is a stipulation to this, however. You are not required to answer “yes” to this question if you only purchased your cryptocurrency with real currency.
Crypto Tax Rates for 2021
As with all other forms of income, cryptocurrency has its own unique tax rates depending on your filing status and the amount you gained.
With cryptocurrency, your gains’ tax rates may change depending on whether they were short-term or long-term gains. To determine which you have, consider the amount of time you held your crypto before selling it. For 365 or less, you pay for short-term gains. Anything more than this and you pay for long-term.
Here are the 2021 cryptocurrency tax rates as given by the IRS:
Data souce: IRS
Keep in mind, you can also choose to notate that you sold crypto you’ve held for longer than one year first so you can take advantage of those lower tax rates.
For example, let’s say you’ve been purchasing Ethereum for three years and now you’ve decided to sell some. By selling only an amount of Ethereum you’ve held for longer than a year, you can take advantage of those lower tax rates.
How to Tax Gifts of Cryptocurrency
Luckily for all cryptocurrency traders, gifts of cryptocurrency are simple: they are taxed exactly the same as other gifts.
This means that any amount of cryptocurrency given to you that is less than $16,000 worth is not taxable under current IRS guidelines. However, if you are the one giving that $16,000 worth of cryptocurrency, you can still deduct it from your taxes.
Giving Crypto Gifts
For those who give cryptocurrency gifts, the rules are simple: if you give less than $16,000 worth of crypto, there are no tax implications for you. Additionally, just because you give over that amount does not necessarily mean you automatically have a tax responsibility either.
For gifts over $16,000, you must report them to the IRS using Form 709. Over time, these reported gifts are added up until they reach a lifetime total of $12.06 million. Once you reach this amount, you may then be responsible for a gift tax.
Moreover, the $16,000 requirement is per recipient. This means you can give $15,999 in crypto to three separate people throughout the year and still not be required to report it as an addition to your lifetime total.
Receiving Crypto Gifts
Like simple buying crypto, receiving a gift of cryptocurrency isn’t usually a taxable event on its own. Regardless, anytime you receive one of these gifts, you’ll want to keep records just in case. Some of the information you’ll want to collect is:
- The date your gift was given. The date you received it in your wallet.
- The gifter’s cost. The original amount the gifter paid for your gift.
- The fair market value upon receipt. This will be how much your crypto was worth when you received it.
- Any gift tax the gifter was responsible for. If they failed to pay said tax, it may fall to you to pay.
Once you sell or convert the gifted crypto, however, it becomes taxable at that point based on how much the gift originally cost and how much it sold for.
To make this simpler, let’s look at some real numbers:
Your friend buys 1 Bitcoin (BTC) for $2,000 at the end of 2018 when the price was still relatively low. In a few short years, the coin’s price soars to $40,000 and you decide to cash in.
Because it has been more than one year since the Bitcoin was originally bought by your friend, this is considered a long-term capital gain. Moreover, your gain is whatever the sale cost of your gift was minus its original cost. So, $40,000-$2,000=$38,000.
How to Know if You Owe Crypto Taxes:
It’s common to find yourself asking the question, “Are my crypto gains taxable?” Luckily, there’s a simple way to tell:
Cryptocurrency taxes are only owed if your crypto undergoes what is called a taxable event. This means that your crypto has undergone some sort of transaction other than being gifted or bought.
The different types of taxable events for crypto are:
- Selling your crypto for fiat currency
- Using your crypto to make a purchase
- Trading your crypto for a different type of crypto
Now, keep in mind that these are only considered taxable if your crypto’s worth has gone up. If it hasn’t, it is considered a loss and can still be deducted from your taxes.
Here’s an example of each of these events to make things easier to understand:
Let’s say you bought one Bitcoin for $10,000 over a year ago.
- If you sell that Bitcoin for $40,000, you’d report $30,000 in gains.
- If you used that Bitcoin to purchase a $25,000 RV, you’d report $15,000 in gains.
- If you traded that Bitcoin for $30,000 of any other cryptocurrency, you’d report $20,000 in gains.
However, trades between cryptocurrencies can get complicated. Because of this, you need to keep track of every time you trade between one cryptocurrency and another by notating the date of the trade, what was traded, and what your gains are as of that exact date.
How to Report Crypto on Your Taxes
All of your crypto gains and losses will be reported on Form 8949. Simply fill out this form with the following information:
- Name of the cryptocurrency in question
- Date you acquired the cryptocurrency
- Date you sold or traded it
- Your sales price
- Your bought-at price
- Total gains or losses
You’ll then repeat this process with each taxable crypto event you transacted throughout the year.
Let’s Wrap It Up:
In short, the answer to the question you came here with is Yes, crypto gains are taxable. And while there may be some circumstances where they don’t have associated taxes, they will almost always need to be reported on your end-of-year tax forms anyway.
If you’d like to learn a bit more about how cryptocurrency works or look into how to get your own, I recommend checking out our post on what every crypto beginner should know. Or, get started with our free crypto training modules!
Disclaimer: The information contained on this page is not intended to be used as financial or tax advice, nor is it a valid substitute for professional financial or tax advice.