As we head into the tax filing season, we are receiving an influx of cryptocurrency tax questions from our customers and the general public. With the tax filing deadline returning to the usual date of April 18 this year, now is the best tie to start thinking about how to report your crypto transactions on your tax return.
While the IRS provides some guidelines on crypto taxes, they are not clear and concise. Plus, they added some new ones this year (and have plans to add more). Due to these changes and caveats of crypto taxes, many cryptocurrency investors, just like you, have lots of questions.
At BitIRA, we’re not tax professionals, but we know plenty of them. So, just like previous years, we’ve partnered with a handful of cryptocurrency tax experts to answer the questions you’ve asked us. All of the below questions were submitted anonymously, and we hope the answers help prepare your 2021 tax return. (Check out our 2021 tax expert Q&A and our second round of 2022 FAQs for additional answers to crypto tax questions)
Please check out the bios at the bottom of this article to learn more about the cryptocurrency tax professionals.
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.
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Deductions
“Is there anything I can do to reduce my cryptocurrency tax bill?”
Strict record-keeping is needed in order to track your cryptocurrency transactions. Taking advantage of the wash sale rules not applying and remaining within a lower capital gain tax bracket are two examples of ways to reduce your cryptocurrency tax liability.
–Kyle Lucke, Innovative CPA Group
While these can help to reduce your cryptocurrency and (overall taxes), these strategies have to be proactive and not reactive.
(1) With proper tax planning, if you own stocks that are in an unrealized loss position, it is recommended that you sell to net and lower your cryptocurrency gains and essentially your crypto tax.
(2) Assuming you have held the cryptocurrency for 1 year and 1 day, the value has appreciated, and you itemize your income tax return, gifting your cryptocurrency to a 501(c)(3) allows you to deduct a charitable donation for the fair market value (FMV) of your crypto, regardless of your basis, and you avoid paying capital gains tax on the appreciation.
–Nicole Green, NGG Tax
“Concerning the wash sale rule for cryptocurrencies, what exactly changed or is changing?”
If the BBB (Build Back Better) passed, the proposed law would close the loophole, and wash sale under I.R.C. 1091(a) would apply to cryptocurrency. Namely, any loss sustained from the sale or other disposition of cryptocurrency beginning 30 days before the date of sale or disposition and ending 30 days after such date would be disallowed. The same applies to related party sales under I.R.C. 267(b).
–Nicole Green, NGG Tax
Inactivity
“Concerning holding bitcoin vs trading bitcoin– is the former tax reportable or is it only the latter? In other words, if one merely buys and holds bitcoin, not trades it during the year, is it still taxable or tax reportable?”
If one ONLY buys crypto with fiat and does not sell that crypto or exchange it for any other coin or token, there is no tax reporting obligation. (IRS Crypto FAQ #5)
–Matthew Metras, MDM Financial Services
As long as you bought bitcoin (with fiat!) and held it, there is no need to report that, as neither buying with fiat nor holding are taxable events. In fact, the IRS clarified last year (2020) that someone with that situation does not even have to check “Yes” on the box on the first page saying they transacted in crypto in 2021. And of course, if you sell the bitcoin, yes that is a taxable event which you’d not only have to report but also pay taxes on any gain.
–Zac McClure, Token Tax
Digital IRAs
“How are taxes assessed if I rollover cryptocurrency funds from a traditional SDIRA to a Roth SDIRA?”
With traditional IRAs, you do not pay taxes at the time of deposit and pay taxes as you withdraw. With Roth IRAs, you pay taxes as you deposit, but all growth is tax-free. You will owe taxes upon a rollover from a Traditional Self-Directed Individual Retirement Account (SDIRA) to a Roth SDIRA as if you withdrew from the Traditional SDIRA. This is taxed as ordinary income rather than capital gains. If this ends up incurring a large tax liability you can spread this transaction over a couple of years in order to not move yourself into higher tax brackets which can reduce your tax liability.
–Miles Brooks, Coin Ledger
You have to pay taxes on the rollover amount.
–Shehan Chandrasekera, CoinTracker
“When moving (rolling over) an established IRA to a self-directed IRA like BitIRA, are there any taxes due?”
The safest and easiest way to rollover is with a trustee to trustee transfer. The rollover will not have any tax implications by rolling a traditional IRA or a 401k plan to BitIRA.
–Kyle Lucke, Innovative CPA Group
Taxable Events
“How much tax do I have to pay on my cryptocurrency gains?”
A coin position held for one year or less is considered a short-term capital gain, taxed at ordinary tax rates (up to 37% for 2022). A position held for more than one year is considered a long-term capital gain, taxed at capital gains rates (up to 20%).
–Nicholas Hartney, Genesis Tax Consulting
The answer to this question depends on what type of gains you have (short-term vs. long-term), your tax bracket & filing status. Short-term capital gains occur when you sell your coins after holding them for less than 12 months. Tax rates on these gains range from 10% to 37%, depending on your ordinary income tax bracket and filing status. Long-term capital gains occur when you sell your coins after holding them for more than 12 months. Long-term gains are taxed at either 0%, 15%, or 20% based on your taxable income and filing status.
–Shehan Chandrasekera, CoinTracker
The amount of tax you pay depends on what tax bracket you fall under, which is determined by how much total income you are reporting. You will pay a certain percentage of tax based on the gain. Rates fluctuate based on your tax bracket as well as whether your gain was short-term or long-term.
–Miles Brooks, Coin Ledger
“What taxable event(s) does purchasing/investing in a single cryptocurrency, for instance, bitcoin, and then receiving a daily cryptocurrency dividend, in the same cryptocurrency (bitcoin), from that investment incur?”
Generally speaking, daily bitcoin reward receipts are taxed as ordinary income at the time you receive them. However, there are some exceptions to this rule. For example, earning “crypto-back” rewards through credit cards isn’t taxable.
–Shehan Chandrasekera, CoinTracker
Similar to how forks and airdrops are taxed, at ordinary income tax rates with the cost basis the FMV the date you have control over the asset.
–Nicholas Hartney, Genesis Tax Consulting
Purchasing bitcoin is not a taxable event. However, receiving a daily dividend in bitcoin is a taxable event on each day. To calculate your income for your tax return, you need to calculate how much you received in USD each time you received a dividend. There is a lot of work involved with calculating the USD value of bitcoin received every day. Luckily tax software like CryptoTrader.Tax can handle this calculation for you and make things easier.
–Miles Brooks, Coin Ledger
“I moved cryptos across exchanges. Does that constitute a sale (and tax bill)?”
Moving your crypto around to self-owned or self-controlled wallets and exchanges is not a taxable event, and there is nothing to report with these transactions.
–Miles Brooks, Coin Ledger
No, moving from exchange to exchange is not a taxable event.
–Nicholas Hartney, Genesis Tax Consulting
“If I transfer my cryptocurrency by downloading it to a prepaid debit card (as opposed to exchanging it for fiat currency), is that a taxable event either at the time of download or expenditure?”
It is a taxable event once you spend the cryptocurrency. Some practitioners take the position that it is also a taxable event on the download, similar to depositing crypto into a gambling website.
–Nicholas Hartney, Genesis Tax Consulting
The taxable event comes when you dispose of the asset. If you still hold the asset and are spending your crypto when you expense the prepaid credit card, the taxable event comes when you use the card. If by loading the debit card you are disposing of the asset and hold a USD amount on the card, then the income event comes when you load the debit card.
–Miles Brooks, Coin Ledger
If you are transferring cryptocurrency (without converting it to cash or anything else) from your exchange account to a prepaid card, that’s not a taxable event. However, when you spend those coins to buy something, that triggers a taxable event.
–Shehan Chandrasekera, CoinTracker
“Do I have to pay taxes on a $10 gain? Is there a certain lower limit where tax is 0%?”
Yes, unfortunately, in the U.S. you do have to report even a $1 gain on a $10 purchase and pay taxes on any gain. Interestingly in the UK, you’d actually be below their taxation and reporting thresholds. And to complicate things further, there is also the standard deduction in the U.S., and in the U.S., there is some exemption from federal taxes for a certain amount of capital gain income if that’s essentially your only income – thus, in the U.S., even though it 100% needs to be reported if that was your only taxable event, for example, you may not owe federal taxes, but perhaps you’d still owe state taxes depending on your state – but if you have ordinary income and a regular job and also had a $10 gain essentially yes, you would be taxed.
–Zac McClure, Token Tax
If you are required to file a tax return, for which the threshold will vary based on your filing status, you are required to report all income, including a $10 crypto gain. There are no minimums to avoid crypto reporting. (IRS Pub 17). If you have less than $40,400 in taxable income for the 2021 tax year (single), your long-term sales may be eligible for a 0% tax rate. (IRS Tax Topic 409)
–Matthew Metras, MDM Financial Services
“If I buy and sell the same cryptocurrency multiple times a day, am I taxed every time I sell?”
Yes, a taxable event occurs each time you sell any amount of crypto on a given day. The rules are similar to the purchase and sale of securities. The one exception is that crypto transactions are not subject to the wash sale rules.
–Kyle Lucke, Innovative CPA Group
“I used bitcoin to buy precious metals in 2021. Do I have to pay taxes on the amount of bitcoin I used to buy my gold?”
Yes, since this includes the sale or exchange of cryptocurrency, you will have to pay taxes on the amount equal to the cost of the transaction to purchase the gold.
–Nicole Green, NGG Tax
Assuming this is not in any tax-preferred accounts and is in a normal wallet – then yes as this is an exchange for property, the cost basis of the bitcoin needs to be subtracted against the FMV of the gold at the time of transaction and the gain would be reported on Schedule D and could be long or short term depending on how long you held the bitcoin.
–Tony Hoong, The CPA Dude
Recording, Reporting, and Requirements
“I lived outside of the U.S. for over a year and opened an exchange and traded up to $5,000 in cryptocurrencies. I sold everything and closed the account before returning home to California. Is there a tax reporting requirement?”
If you are a US resident or citizen and you are living abroad, your worldwide income is taxed, so even if you live internationally, you still have to file and report all of your income. Any taxes paid to foreign countries allow you to reduce your tax liability through the foreign tax credit. Unfortunately, capital gain transactions like selling crypto do not qualify for the foreign earned income exclusion. That being said, if this is your only income, you would likely not have a filing requirement as your income amount would be low enough to not meet filing thresholds.
–Miles Brooks, Coin Ledger
“Do I have to pay state taxes on my crypto? How do they treat crypto differently, if at all?”
If you live in a state that imposes state income taxes, you have to pay income taxes on cryptocurrency gains based on your state-level tax brackets.
–Shehan Chandrasekera, CoinTracker
If you live in a state that has an income tax, your crypto activity will be treated the same on your state tax return as your federal tax return.
–Miles Brooks, Coin Ledger
“How do I report forks and airdrops on my taxes?”
Forks and airdrops are taxed as ordinary income at the FMV at the date you have control over the asset. Your cost basis now becomes the amount you reported as ordinary income you will use when you eventually sell the asset.
–Nicholas Hartney, Genesis Tax Consulting
Airdrops are taxed as ordinary income at the time you receive them or claim them.
–Shehan Chandrasekera, CoinTracker
You recognize income from hard forks and airdrops when you have control over the new crypto assets at the initial price when they are received. This will most likely be reported on Schedule 1 as “Other Income.” More information can be found on our airdrop tax and hard fork tax articles.
–Miles Brooks, Coin Ledger
“A family member wants to gift me a huge sum of money made from their crypto tradings. They are not based in the U.S. and didn’t use a U.S. account to trade, but I am based in the U.S. I’d like to put this money in my savings account. Is there any tax implication?”
Generally, the recipient of a gift does not have a reporting or tax obligation. However, depending on the size of a foreign-sourced gift, you may be required to file Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” Additionally, depending on the nature of the transaction, other forms such as the FinCEN 114A may be required. Foreign tax reporting can get exceptionally complicated very quickly, so it would be prudent to consult with a professional that specializes in foreign tax issues.
–Matthew Metras, MDM Financial Services
“If I purchase a cryptocurrency and earn interest on it, are there taxes? If so, how are the taxes calculated?”
The purchase of cryptocurrency is classified as property. A taxable event occurs when a taxpayer exchanges virtual currency for other property. The amount of gain or loss is based on the difference between the fair market value of the property received and the adjusted basis of the property given up.
–Kyle Lucke, Innovative CPA Group
“My crypto broker mentioned they will start sending 1099-B tax forms next year. What is that? What should I do with it?”
If you trade stocks today, your brokerage sends out this form to you already. This is a tax form that reports all the trades that you transacted in the tax year. It is a nice summary for you as the cost basis for crypto is actually hard for most people to determine. You can take this form and easily fill out your form 8949 and schedule D when you fill your taxes.
–Tony Hoong, The CPA Dude
“I mined various cryptocurrencies in 2021. Do I owe taxes? If so, how much?”
The assumption is that you mined it in a normal account (no tax-preferred accounts). If this is not your main business then it is treated as other income and subject to your ordinary tax rates. If it is your main business you will have self-employment taxes due on it but then you are able to take business expenses against that income.
–Tony Hoong, The CPA Dude
“My bitcoin was stolen from my Coinbase account. Can I claim a loss or theft?”
Special Considerations
“Where exactly on which tax return are the cryptocurrency transactions entered?”
Crypto trades, whether for another coin/token, are reported on IRS Form 8949, which in turn flows to Schedule D. Other transactions such as mining, staking, forks, airdrops, lending interest, yield farming, and others will go on other places on the return, such as Schedule C or Schedule 1, Line 8. The exact treatment will vary based on the nature of the transactions (IRC §162;§183)
–Matthew Metras, MDM Financial Services
At this point, several places, unfortunately. The first page of the return has a box asking if you have any crypto activity which you’d have to check. Every capital gain and loss transaction is reported on Form 8949, which consolidates to the Schedule D and finally rolls up to the 1040. Yield farming, staking, airdrops, mining, and other transactions likely would be reported as Schedule C Income or perhaps Other income (but subject to NIIT)- but consult with a tax professional for clarification on that. Oh, and don’t forget, if you have over a certain materiality, foreign exchanges should likely be disclosed on the FATCA Form 8938. Aren’t taxes fun!
–Zac McClure, Token Tax
“Do you have any insight into taxes on cryptocurrency staking, as well as how to calculate them?”
Yes, it’s certainly income. The type of income is unclear but could arguably be ordinary income on a Schedule C taxable at your normal tax rates, or other income subject to NIIT, or other tax professionals I’m sure have even put it on other tax forms – the one certainty is that it is taxable income.
–Zac McClure, Token Tax
First, it is important to recognize that “true” staking, meaning Proof of Stake blockchain validation (ADA, XTZ, ETH2.0, etc.), may be subject to different taxation than things like AAVE, Compound, or other yield farming, which is also referred to as “staking” by members of the crypto community. Yield farming rewards are income and must be reported on Schedule 1, Line 8 (§61).
True staking is a little more complicated. The IRS has released no guidance at all on staking. Many feel it should be treated as income in the same manner as mining. Others feel that as it is the creation of new property, it should not be taxed until it is sold. At the time of this writing, there is pending litigation in the U.S. District Court regarding the taxability of staking rewards (Jarrett et al. v. United States of America). In the meantime, if a taxpayer is considering a position that staking is not taxable, it is crucial they consult with a competent advisor to fully understand the potential risks of such a position.
–Matthew Metras, MDM Financial Services
“How could the Build Back Better reconciliation bill affect the ways cryptocurrencies are taxed?”
The Build Back Better Act would subject cryptocurrency transactions to wash sale rules that currently apply to stocks and bonds, starting in 2022. The fact that cryptocurrencies are dissimilar enough that selling Bitcoin and then quickly buying Ethereum would not violate the rules. The similarities begin and end with the coins being exchanged on a blockchain.
–Kyle Lucke, Innovative CPA Group
The now-stalled bill, the Build Back Better Bill (BBBB), would have expanded the application of the wash sale rules under I.R.C. section 1091(a) to cryptocurrencies and other digital assets and likely the constructive sale rules under I.R.C. section 267(b).
If this version of the bill were to pass, it would make tax changes targeted at cryptocurrency, including imposing rules related to wash sales. This would apply limits on tax-loss harvesting similar to that of stocks and securities. In general, the wash sale rules disallow a loss from a sale or disposition of stock or securities if the taxpayer acquires or enters into a contract to acquire a substantially similar stock or securities thirty days before or after the sale giving rise to the loss. The basis of the acquired assets in the wash sale is increased to include the disallowed loss. Thus, to avoid a wash sale, a cryptocurrency holder will have to wait 30 days before (and after) buying the same coin that was sold at a loss. If you purchase the same coin without waiting for 30 days, the IRS would disallow the loss as it applies to I.R.C. section 1091(a).
The Build Back Better Bill would also have expanded the wash sale rules to include transactions made by related parties. Under BBBB, a wash sale would also have occurred when a “related party” to the taxpayer acquires a substantially similar stock or securities within the thirty-day period. More significantly, the disallowed loss in a wash sale triggered by a related party would have been permanently disallowed under this proposal. Generally, and for this purpose of disallowance of a loss, the IRS defines related parties under Code Section 267(b) to be the seller’s immediate family: brothers or sisters (whole or half-blood), spouses, ancestors, and lineal descendants. So, as an example, if a parent were to sell stock at a loss and, within 30 days, the child purchased the same stock, the parent’s loss would be disallowed.
–Nicole Green, NGG Tax
“To minimize my tax exposure, should I buy altcoins using bitcoin or dollars?”
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Tax Specialist Bios
We’d like to thank the crypto tax professionals who answered your questions for the 2021 tax season. Below is the professional background information of each specialist.
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.
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.
Kyle Lucke, Innovative CPA Group
Kyle Lucke, EA is a Tax Manager at The Innovative CPA Group. Kyle has been in the public accounting world for over twenty-eight years and private accounting for five years. Kyle’s focuses are in tax review and research, individual, corporate, and fiduciary accounting, federal, state, and foreign compliance issues, and IRS and state representation. Kyle is a cryptocurrency enthusiast and loves to be as hands-on as possible with his clients who invest in it as well.
Nicholas Hartney, Genesis Tax Consulting
Nick Hartney is the only licensed tax professional that holds an IRS Enrolled Agent license and is an expert in tax debt resolution, income tax preparation, foreign earned income (U.S. International Tax Certificate from the AICPA), a Certified Acceptance Agent (authorized to assist individuals who require a Taxpayer Identification Number), and designated as an advanced crypto tax expert (ACT-E).
Zac McClure, TokenTax
Zac had an eclectic career before starting TokenTax. After a 2-year stint in Investment Banking, he joined Teach For America where he taught math infused with personal finance and entrepreneurship – two passions that make up the foundation of TokenTax. The company currently works hard to teach clients about advanced tax topics such as accounting methods, tax-loss harvesting, retirement planning, and portfolio diversification. Previously Zac also worked for social enterprises in Zimbabwe, Zambia, Madagascar, and India, as well as Social Impact investment firm Imprint Capital, Bain, and Elsevier. He earned an MBA from Wharton, and also holds degrees in International Finance and Accounting from USC.
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.
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.