If you are confused about your US 2021 crypto tax return, you aren’t alone.
Young investors feel confused by the tax laws, intimidated by the calculating crypto gains, and embarrassed that they don’t understand how to do their crypto taxes.
Worse yet, young American crypto investors are terrified of doing it all wrong, leading them straight into the hands of IRS audit.
If you are a millennial new to investing who has never learned about the taxation of investments, we know your head is spinning when it comes to tackling your 2021 crypto taxes.
So we’d like to make one part of this overwhelming process simple for you.
Today we break down six important things to know about your 2021 crypto tax return.
1. Whenever you trade one cryptocurrency for another, then the gain on the value of the first currency is taxed.
Far too many people think you are only taxed if you go to cash, which is incorrect.
All gain in US dollar terms is taxed when you sell something.
A staggering number of crypto investors don’t understand this.
Many young investors have never learned about the taxation of investments, so it’s all-new.
Numerous crypto investors mistakenly believe taxation occurs only when cash is taken out. This is incorrect.
If you buy one Bitcoin at $6000 and trade it for $30,000 worth of ETH, when that Bitcoin is worth $30,000, then you have made a gain in the exchange of your bitcoin.
The amount of that gain is ($30,000 – $6000) $24,000.
This $24,000 gain is taxed as ordinary income at your tax bracket.
If you hold the coin longer than a year (before you sell it), long-term capital gains rates apply (which is 15% for most people).
2. Virtually everyone should answer yes to the new virtual currency Form 1040 question.
When filing your 2021 crypto tax return, you’ll discover the IRS has revised Form 1040 to include a “Yes or No” question:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? “Yes or No.”
Almost every taxpayer has a financial interest in some form of virtual currency, by this IRS definition.
All of these examples are different forms of virtual currency and are forms of a digital representation of a store of value.
- Frequent flyer miles
- Grocery store loyalty cards
- Credit card reward points
This is the same definition the IRS uses for classifying cryptocurrencies.
Meaning that almost everyone should answer YES to this new virtual currency question on Form 1040, even if you don’t own cryptocurrencies.
3. Airdrops and interest from staking and lending are taxed as ordinary income at the fair Market value in US dollars on the day received.
For some coins, it is unclear what the fair market value is when received. In these cases, I recommend a zero value when received.
4. You’re taxed on your net gains. Net gains are your gains minus your losses for the year. Therefore, you should report all losses to reduce your taxes.
Examples of losses are:
- A coin that loses value.
- A coin that becomes worthless, lost or hacked, or stolen.
- Coins taken through a financial scam.
Crypto Tax Win: It always hurts to lose money, but the silver lining is that you get to reduce your crypto gains by your losses and save on your crypto taxes.
5. It’s almost impossible to calculate your crypto gains without using a crypto gain calculation service like Accointing.
There are several good services out there.
Accointing’s interface is clean and geared towards helping the taxpayer with his/her calculations.
6. If you get a 1099K from any US exchange, your tax return needs to account for all the trades you did during the year. Otherwise, you are asking for an IRS audit.
You need to list the 1099K on your tax form. By doing so, you signal to the IRS that you did not ignore it.
If you ignore it, you will get a CP2000 letter.
We know because CryptoTaxAudit is the largest firm specializing in crypto tax audit representation before the IRS.
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