Cryptocurrency and Taxes: What You Need to Know in 2021

Cryptocurrency Tax Basics

Cryptocurrencies are treated as property by the IRS. This means that each trade, sale, or exchange of a cryptocurrency is a taxable event. You must report any gains or losses on your tax return. If you hold a cryptocurrency for less than a year before selling it, the gains are considered short-term and taxed at the same rate as ordinary income. If you hold a cryptocurrency for more than a year before selling it, the gains are considered long-term and taxed at a lower rate. The IRS also requires you to report any income earned through cryptocurrency mining or staking as taxable income.

Cryptocurrency Tax Reporting

You must report any cryptocurrency gains or losses on your tax return using Form 8949 and Schedule D. It is essential to keep track of your transactions and your cost basis—the amount you paid to acquire the cryptocurrency. Failure to accurately report your cryptocurrency taxes can result in penalties and interest charges. If you receive a Form 1099-K from a cryptocurrency exchange or broker, you must report that information on your tax return. It's crucial to reconcile the 1099-K with your own records to ensure that you are reporting accurate information.

Crypto-to-Crypto Trading

If you exchange one cryptocurrency for another, it is still a taxable event. The IRS treats this exchange as the sale of one cryptocurrency and the purchase of another. You must report any gains or losses on the transaction, just as you would with a traditional stock sale. It's important to keep detailed records of these transactions, including the value of the cryptocurrencies at the time of the exchange.

Cryptocurrency Donations

Cryptocurrency donations to eligible charities are tax-deductible. However, the donation must be to a qualifying organization and held for more than a year before being donated. The tax deduction is equal to the fair market value of the cryptocurrency on the day of the donation, and you won't owe taxes on any gains on the donated cryptocurrency.

Take Advantage of Tax-Loss Harvesting

If you have investments in cryptocurrencies that have decreased in value, you can sell them to offset gains from other investments. This strategy is called tax-loss harvesting and can help to reduce your tax bill. However, you must be careful not to repurchase the same cryptocurrency within 30 days, or it will be considered a wash sale, and the losses won't be deductible on your tax return.