2021 posed an interesting year for cryptocurrencies. Bitcoin and many other digital currencies hit all-time highs in November before shaving off nearly half of the gains it added since January. For example, BTC peaked at 130% gains in November, before closing the year out with a 62% growth for 2021.
And while cryptocurrencies faced their ups and downs, their utility is what matters most. Investors view cryptocurrencies as not only a smoothly operating portion of the global economy but as a hedge against inflation and a way to cut out big banks.
If 2021 was the first time you invested in cryptocurrencies, you’re not alone. Nearly 55% of cryptocurrency investors bought into digital currencies in the last year. This is likely the leading reason we’ve received over double the tax questions we normally get as we enter the tax filing season.
Earlier this year, we partnered with leading CPAs to answer the crypto tax questions you sent. But since then, we received so many more great questions that we had to help. So, we reached out again to the best CPAs specializing in digital currency taxation to help. We hope the answers below are helpful as you prepare your 2021 tax returns (due April 18, 2022). (Check out our first 2022 crypto tax Q&A for additional answers.)
To learn more about the cryptocurrency tax pros that answered these questions, read their bios at the bottom of this article.
Note: Readers should consult a qualified tax professional for advice specific to their situation – you can find one here. We hope this Q&A can help you ask the correct questions when you consult professional advisors on your own. Please do not take this as advice; consult a professional.
Article Content
Ask a Tax Question
Got a crypto tax question you’d like to have one of our partner tax experts answer in a future post? Submit in the form below.
Digital IRAs
“I assume my crypto transactions within the Roth SDIRA are not taxable events. Is this correct?”
Yes, this is correct. However, maintaining “clean” transactions, good bookkeeping, and a solid paper trail is key. It is important that funds within your SDIRA do not commingle on an exchange account in which you trade other crypto assets that are not related to your Roth SDIRA.
–Shanyn Stewart, Advanced Accounting Tax & Financial Services, LLC
“Do I have to pay tax on the fees I earn on the Roth crypto I loan out?”
You should be very careful doing anything DeFi related inside of an IRA. DeFi makes it very easy to accidentally engage in a “prohibited transaction.” (§4975). Doing so could deem your entire IRA invalid and distributable to you. The IRS specifically calls out the collateralization of IRA assets as a prohibited transaction.
–Matthew Metras, MDM Financial Services
“If I open a Bitcoin Roth IRA and fund it with 6K cash, is that tax-deductible?”
Roth IRA contributions are after-tax money, so there is no deduction. (With a traditional IRA you MAY be eligible for a deduction). The crypto nature does not impact deductibility. Roth contributions have income limitations, so one should check that before making contributions.
–Matthew Metras, MDM Financial Services
“I have purchased (ETF) shares in a limited partnership (LP) that owns bitcoins held in cold wallets stored at a digital storage facility. The share price is determined using a volume-weighted median price method from a mix of different bitcoin exchanges (Bitcoin Benchmark Index). This LP ETF fund is held in a regular (not self-directed) Roth IRA. The General Partner has stated that there are no plans to accept any additional income from airdrops. There are also no plans to divert from a fork. Is there any other potential unrelated business taxable income that I need to be concerned about? Since this fund sits inside a Roth IRA (and F-1065 does not need to be part of my tax return), do I need to wait until after I receive my K-1, or is it safe to file my taxes without the K-1?”
If the LP interest is owned by an IRA, the K-1 has no impact on your personal income taxes.
–Shehan Chandrasekera, CoinTracker
Inactivity
“I have crypto but have not traded it. Is that taxable?”
If you didn’t trade, there’s no taxable event.
–Shehan Chandrasekera, CoinTracker
Taxable Events
“I did some trading in the first quarter of 2021 and did not touch my crypto after that in 2021. I did not make any profit. It seemed like I made a lot of money in December 2021. However, I am down 60% with my crypto portfolio now in 2022.”
Assuming indeed you had made a lot of money in December 2021, you will need to report it even though now your crypto portfolio is down 60% in 2022. Actually, it doesn’t matter whether you had a gain or loss, you are required to report all your crypto trades that occurred during the tax year, and you cannot use losses from a later year to offset gains in an earlier year. Also, you need to report all your crypto trades even if you didn’t cash out. Cashing out is not a taxable event. Selling crypto for fiat or for another crypto is.
–Sharon Yip, Crypto Tax Advisors
“Is it a taxable event to move tokens from one wallet/exchange to another?”
No. Transferring crypto from one account to another account is not a taxable event. You do not need to report it on your tax return.
–Sharon Yip, Crypto Tax Advisors
No, transfers between wallets/exchanges are not taxable events. The same applies to transfers between hot and cold wallets.
–Nicole Green, NGG Tax
“If I pay an artist $250 for a painting with Bitcoin, is that a taxable event?”
Yes, by purchasing the art with Bitcoin, you are exchanging one asset (Bitcoin) for another asset (the painting). Any time there is an exchange of one asset for another, it creates a taxable event.
–Shanyn Stewart, Advanced Accounting Tax & Financial Services, LLC
“Is it a reportable/ taxable event if through a crypto website I transfer cryptocurrency directly to a friend or family member?”
If you directly transfer cryptocurrency to a friend or family member as a gift and it is more than 16K then a 709 gift tax return will need to be filed.
–Tony Hoong, The CPA Dude
“To minimize my tax exposure, should I buy altcoins using BTC or USD?”
It depends. USD is definitely easier from a record-keeping standpoint as buying crypto with USD is not taxable (or reportable). Using BTC to buy crypto is a sale of the BTC, so that sale needs to be reported. (The buying of the altcoin is still not reported). If the BTC is now worth more than when you acquired it, it likely has a taxable gain. If it has gone down in value, you may have a tax loss and could actually save money on tax by using the BTC instead of USD.
–Matthew Metras, MDM Financial Services
“How does the IRS tax proceeds from yield farming?”
The IRS hasn’t issued any yield farming-specific tax guidance. If you rely on general tax principles, yield farming rewards are taxed at the time of receipt. That said, you need to look into the specifics of each protocol and coin to determine how it should be taxed.
–Shehan Chandrasekera, CoinTracker
Recording, Reporting, and Requirements
“Is there a time limit on whether you need to report earnings?”
The statute of limitation for tax return filing is usually 3 years after you file your tax return (or after the original filing due date if you filed early). However, if your return includes a “substantial understatement of income”, the statute of limitation becomes 6 years. Generally, this means that you have left off more than 25 percent of your gross income.
–Sharon Yip, Crypto Tax Advisors
“In 2021, I transferred funds from an existing Roth IRA into a new SD Roth IRA to purchase crypto coins. I also traded one cryptocurrency for another during 2021. How do I answer the question at the top of form 1040?”
The question should be answered – “Yes;” based on the facts presented, you traded cryptocurrency.
–Nicole Green, NGG Tax
The first question after your personal information on the 1040 is “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” If we dig a little deeper at the instructions for the 1040, we get a clearer description that reads “If in 2021, you engaged in a transaction involving virtual currency, you will need to answer “Yes” to the question. Since there was a “transaction” that involved sending the cryptocurrency out of the ROTH IRA and into your SD Roth IRA, then you should check “yes” to this question. It does NOT, however, mean this is a taxable event.
–Shanyn Stewart, Advanced Accounting Tax & Financial Services, LLC
“Where do I get my 1099s from Coinbase, Hotbit, and Kraken? Do they send them out? Will I have to hunt for them online?”
Cryptocurrency exchanges are not required to issue 1099s until Jan 2024 (Infrastructure Investment and Jobs Act). Until then, different exchanges voluntarily issue 1099-B, 1099-K, and 1099-Misc on an exchange-by-exchange basis. The taxpayer is still required to accurately report transactions whether or not they receive a 1099.
–Matthew Metras, MDM Financial Services
“If you have crypto on a foreign exchange and have over $10,000 at any time in 2021, do you have to file an FBAR form on your taxes with FINCEN? What if your account is locked and you don’t know how much is in there?”
Yes, you will need to file an FBAR if the amount is over $10K at any time during the tax year. The account should have all efforts tried to unlock the account to get the current value. Or make efforts to determine the value of the account.
–Tony Hoong, The CPA Dude
Special Considerations
“I was scammed for several thousand dollars. If I filed a police report, and have correspondence with the exchange can I write that amount off as a loss?”
Filing a police report is a great way to prove the existence or occurrence of theft to sustain a theft loss deduction. I.R.C..165 broadly allows taxpayers to deduct losses sustained in the year you discover the property was stolen if the amounts are not compensated for by insurance or otherwise. However, you can no longer claim theft losses on a tax return unless the loss is attributable to a federally declared disaster. This deduction was suspended until 2026 under the Tax Cuts and Jobs Act (TCJA) that went into effect on January 1, 2018.
–Nicole Green, NGG Tax
A capital loss up to 3K per year can be taken. If more than 3K was stolen, then the amount would be carried forward into the future to use when there are gains or to take another 3K capital loss.
–Tony Hoong, The CPA Dude
“How do staking rewards get handled? Are they only income if you withdraw them or otherwise have access to them (for example ETH 2.0 staking rewards)? How do you determine the cost basis?”
Staking rewards are currently in the air with the IRS. The IRS has previously issued guidance stating that it is taxable. However, a new court case has come out stating that staked rewards are not taxable. Depending on your position, the tax would be due when it is earned in the former. Or tax is due when you convert or withdraw in the latter. Basis would be the Fair Market Value (FMV) when the reward was received in the former and the FMV when exchanged/cashed in the latter.
–Tony Hoong, The CPA Dude
“Our Bitcoin was stolen while trusted to an account with Coinbase. They refuse to do anything. Can I claim this $31,000 loss (theft)?”
Unfortunately, thefts losses, in this case, aren’t tax-deductible.
–Shehan Chandrasekera, CoinTracker
“How do I report stolen crypto tokens from my Metamask and from Indexed Finance?”
Unfortunately, if you are an individual crypto investor, you cannot take a tax deduction for the crypto someone stole from you. Stolen crypto is considered a personal casualty loss. It is not deductible under the current tax law.
–Sharon Yip, Crypto Tax Advisors
“What is the most tax-efficient way to distribute crypto of a deceased owner without a will to beneficiaries?”
It is highly recommended that anyone with significant assets in crypto have a plan to pass on their wealth after death, including setting up a will. You should ask yourself, “if I pass away tomorrow, will my loved ones be able to access my crypto?”
–Miles Brooks, Coin Ledger
“My wife and I are considering moving to another country post-retirement. If I’ve paid my crypto taxable events up to the point of the move date, what happens on future gains – or losses? a) if we remain US citizens? b) if we denounce our U.S. citizenship?”
If you remain a U.S. Citizen, the IRS has a legal claim against all of your earnings and all of your capital gains, regardless of your personal physical location or the location of where the income was earned or capital gains were achieved. For all intents and purposes, if you maintain your US Citizenship, your overall tax liabilities and reporting requirements do not change even if you’re not living on US soil.
If you are renouncing your U.S. Citizenship, you’ll first start with a $2,350 fee for doing so. From there, you may be subject to an “exit tax” upon the total value of your assets (including your home) if your net worth is more than $2 Million.
–Shanyn Stewart, Advanced Accounting Tax & Financial Services, LLC
Tax Specialist Bios
A special thanks to all the crypto tax professionals who answered your additional questions for the 2022 tax season. Below is the professional background information of each specialist.
Matt Metras, MDM Financial Services
Matt Metras, EA is the owner of MDM Financial Services in Irondequoit, NY. He has been practicing since 2003 and specializes in bookkeeping and taxation for cryptocurrency clients. He is a frequent guest on the Bitcoin Taxes podcast. He has instructed on Cryptocurrency Taxation for the National Association of Enrolled Agents, The American Institute of Certified Tax Planners, and many other organizations and is a contributing writer for thinkoutsidethetaxbox.com. Additionally, he is an administrator of the “Bitcoin & Cryptocurrency Tax Info” Facebook group and a moderator of the r/cryptotaxation subreddit. Matt is also a passionate community advocate and serves on his local Board of Education.
Shehan Chandrasekera, CoinTracker
Shehan is one of the handful of CPAs in the country who is recognized as a subject matter expert on cryptocurrency taxation. He is the Head of Tax Strategy at CoinTracker, a Forbes Crypto Tax Analyst and a CPE instructor who has won multiple awards: 2020 & 2019 CPA Practice Advisor 40 under 40 accounting professionals, Outstanding Young CPA of the year, Rising Star of Texas & Among 21 accountants mentioned on Accounting Today who will be helping shape (and reshape) accounting in 2020 and beyond by Accounting Today. Shehan is a renowned speaker who has done speaking engagements with many organizations, including Google, Coinbase, Square, Consensus, Coindesk, Lyft, AICPA, American Bar Association, and a plethora of state CPA Societies.
Miles Brooks, CoinLedger
Miles Brooks is a Certified Public Account and is the Director of Tax Strategy at CoinLedger (coinledger.io is a cryptocurrency tax software platform built to automate the entire crypto tax reporting process). Miles holds a Master of Science degree in Taxation from California Polytechnic State University-San Luis Obispo. Before joining CoinLedger, Miles previously worked at Apercen Partners, a boutique tax firm that specializes in servicing ultra-high net-worth founders and investors with income and wealth planning strategies. Miles is a crypto tax expert and has been working with the taxation of cryptocurrencies since 2017.
Nicole Green, NGG Tax Group, Inc.
Nicole Green, MST is a Principal at NGG Tax Group, Inc. with over 15 years of tax experience. She provides compliance, consulting, and audit representation services to taxpayers and other advisory firms. Nicole also guides US and foreign nationals on a wide range of cross-border transactions to help unravel the complexity of the US tax system. Nicole is a crypto enthusiast and investor who holds a master’s degree in Taxation as well as a Certified Bitcoin Professional Certificate. Nicole is an IRS Enrolled Agent which allows her to represent clients in all 50 states.
Sharon Yip, Crypto Tax Advisors
Sharon Yip, CPA has over 20 years of tax and accounting experience in public accounting and corporate. She received a Master of Science degree in Accounting – Tax Consulting from University of Virginia, and she worked as a senior tax manager at Deloitte and later a corporate tax director at a Fortune 500 company before she started her own tax practice in early 2018. Sharon became a crypto investor and blockchain enthusiast in 2017. Since then, she quickly became one of the top crypto tax experts in the U.S. She published articles on Bloomberg Tax and several other places, and she was interviewed by news media such as CoinDesk and cryptonews.com. Sharon is a founder of Crypto Tax Advisors, LLC and a co-founder of Polygon Advisory Group, LLC. She specializes in serving crypto investors with complicated transactions and blockchain companies in need of crypto accounting assistance.
Tony Hoong, The CPA Dude
Tony is a crypto investor himself and has taken a guinea pig approach by investing in crypto, NFTs, staking, P2E, and mining himself to understand all the tax implications. The CPA Dude takes an upfront approach for taxes by servicing their clients with tax planning throughout the year to mitigate their tax liabilities and then wraps up their taxes by filing them during tax season. Tony used to work at KPMG in the State and Local Tax department and has a firm understanding of all 50 state taxation and later worked in Uber’s and Doordash’s tax department as a tax manager before starting up his own practice. The CPA Dude has an outside-of-the-box and tailored solution for its clients and prides itself on their speed of communication.
Shanyn Stewart, Advanced Accounting Tax & Financial Services, LLC
Shanyn Stewart began her career with General Electric as one of two accountant/advisors that worked directly with GE employees and executives to mitigate taxation throughout the county. She has worked with 28 of the different GE business presidents since that time. In 1996 she started Advanced Accounting to assist clients apply those principles she learned at GE to assist in reducing their tax liability.
In addition to her Life, Health and Variable Contracts, Shanyn holds Series 6, Series 7, Series 63 and 65 licenses. Shanyn holds an Associates in Accounting, a Bachelor’s Degree in Management and Organizational Development and Accounting, and a Master’s in Forensic Accounting. She is a Certified Senior Advisor and Certified Acceptance Agent with the IRS. In 2008 Shanyn was accepted into the non-profit Heartland Institute of Financial Education as a Certified Financial Educator. In May 2017 Shanyn received her designation as a Certified Tax Master. This designation is for CPA’s and EA’s (Enrolled Agents) and is held by those that demonstrate the highest understanding of tax planning strategies.
Shanyn is the author of, “The 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands” and her personal journey titled, “Forty Days and Forty Nights” will be published in 2018. Her book co-authored with Amani Ahmed, CPA entitled: “How to Easily Run a Tax Practice in No Time” will be published March 2018.
Note: The information presented in the article above is intended for educational purposes only. It is in no way meant to offer financial advice, and specific guidance about how to properly pay taxes in each individual case should be sought from a certified accounting professional.
Looking for CPA Crypto professionals that might be able to help with your taxes? Check out our growing directory of professionals.