Back in 2014, when the IRS first set out guidance on cryptocurrency taxation, less than 900 individuals reported crypto. Between 2013 and 2015, the market bitcoin was relatively small and wasn’t reported on their taxes.
Now however, the IRS is much more confident that people have not been reporting their cryptocurrency gains. As a result, they have made strategic moves to have it reported. One such effort was in 2020, when they moved questions of crypto gains from Schedule 1 of taxes to the 1040 form itself.
The IRS is so serious about the lack of reporting of crypto that it is now sending out thousands of letters to individuals whose names were reported as buyers of cryptocurrency through various sources.
All this said, you do not have to report buying cryptocurrency. For instance, if you bought a couple of bitcoins (even as high as say, $30,000 in 2021), so long as you haven’t sold it, it’s not taxable yet.
However, if you bought bitcoin at $30,000 and sold at a profit (or a loss,) then you must report it on Schedule D of your taxes as capital gains.
But note, that capital gains taxes come in two forms, short-term and long-term capital gains.
Capital Gains and Crypto
Let’s say you bought a cryptocurrency in March of 2021, and the price dramatically went up on that cryptocurrency in June, and you sold out at a substantial profit. Since you did not keep the cryptocurrency for over a year, then you would pay short-term capital gains profits.
If however, you bought the cryptocurrency in 2015 and kept it until June of 2021, then you would pay long-term capital gains, which are generally less than short-term capital gains.
In many cases, when you buy or sell a cryptocurrency, then the exchange where you bought it will send you a 1099B, Proceeds from Broker and Barter Exchange.
But what about when you spend cryptocurrency? Let’s say that you bought a cryptocurrency for $300 and then it shot up to $800 over 6 months. But instead of selling out the cryptocurrency on an exchange, you transfer ownership of cryptocurrency to a company in exchange for goods.
You must report that $500 profit as capital gains as well, even if you exchange your
cryptocurrency for physical goods.
Frequently Asked Questions
Do you pay taxes on crypto?
Yes, currently crypto is considered “property” which means they’re as taxable as any real property you own. It’s also subject to capital gains taxes depending on when you sell.
How can I avoid getting taxed on crypto?
Not selling would be the only real way to avoid taxes on crypto. The taxes come once you sell it and if you realize a gain. To avoid taxes, don’t sell it.
Meanwhile, this opens the question, can you report a loss on crypto and the answer is, yes. Again, it’s not ideal (as any loss is), but it can offset your capital gains and up to $3,000 of your personal income. If it exceeds that amount, then it can be applied to future tax years.
Do I need to report crypto I didn’t sell?
No, because it means you have no gains or losses to report. However, even if all you did was exchange crypto, you do need to report it to the IRS.
Image by Reto Scheiwiller