Two years in a row, the Internal Revenue Service has included a “virtual currency” related question on the tax forms. If you’re new to the crypto space, you’d definitely want to know how to file crypto taxes, how they are taxed, and most importantly, how to answer the crypto tax question on the IRS tax form.
How is Crypto Taxed in the USA?
According to Notice 2014-21, cryptocurrency is classified as property by the IRS, and cryptocurrency transactions are taxed just like any other property transaction. Whenever you sell, trade, or dispose of bitcoin in any manner and make a profit, you will have to pay taxes.
Let us understand this with an example.
Suppose you bought $1,500 of cryptocurrency and then sold it for $2,500, you must declare and pay taxes on the $1,000 profit. If you sell cryptocurrencies and lose money, you can deduct it from your taxes.
How to File Crypto Taxes?
If you’re new to the crypto space and are wondering how to file crypto taxes, just follow the three simple steps:
1. Keep a Record of your Crypto Transactions
The first step in how you can streamline your tax filing process is by keeping an account of all your crypto transactions. Cryptocurrency is taxed on your profit, so if you aren’t aware of how much you bought it for, calculating your gains and losses will be difficult.
For example, suppose you bought crypto worth $1,800 and sold it for $2,000. As per IRS regulations, you only have to pay taxes on the $200 profit that you made. But if you do not have the records for the fact that you bought it for $1,800, you’ll have to end up paying taxes on the entire $2,000.
Sounds like a tedious task?
Most cryptocurrency exchanges will let you download a report of all your transactions. Additionally, you can also take the help of cryptocurrency portfolio trackers, which enable you to keep track of previous transactions, their value, and their destinations or sources. They also display the current market price of any cryptocurrency they support.
2. Crypto Capital Gains & Losses
The capital gains you must pay depend on how long you have held your cryptocurrency.
Long-term capital gains tax
- Holding cryptocurrency for more than 12 months
- 0% to 20% depending on your overall income
Short-term capital gains tax
- Holding cryptocurrency for less than a year
- 10% to 37% depending on your overall income
The IRS states that your holding period begins the day after you buy a cryptocurrency. Thus, it’s crucial to understand when you got your crypto asset and what tax rates and restrictions apply when you sell or exchange it.
3. Filing Crypto Taxes
Filing your crypto taxes is the final step for how you can file your crypto taxes.
Here’s a quick rundown of the most important crypto tax forms:
| Tax Form | Purpose |
| Form 8949 (Sales and Other Dispositions of Capital Assets) | Complete summary of all crypto activities like selling, trading, etc. |
| Schedule D (Capital Gains and Losses) | Summary of your Form 8949 and includes the sum total of short term and long term capital gains |
| Form 1040 (Individual Income Tax Return) | Calculates total taxable income |
| Schedule 1 | Your total additional income from crypto activities |
| Form 1099 K | Report non-employment income to the Internal Revenue Service. |
Crypto Question on the IRS Form
The IRS has a bitcoin question for the second year in succession. This question is present on Forms 1040, 1040-SR, and 1040-NR. This question must be answered by all crypto users who have dealt with crypto this year.
The question is: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any virtual currency?”
The yes-no question was put towards the top of the form, just below the part where a filer provides their name, address, and Social Security number.
Even though the IRS has a set of very useful and most asked FAQs up on their website, you might still be a little confused about whether to check yes or no.
Checking “Yes”
If any of the following events are carried out, you will need to check “yes” in the tax form:
- Receiving cryptocurrency coins or tokens in exchange for products or services.
- A virtual currency transfer or exchange for another crypto, property, service, or product.
- Earning digital rewards as a consequence of crypto staking or mining operations.
- A virtual currency sale or any other financial stake in virtual currency disposal.
Checking “No”
If all you did last year was own crypto (and not sold any), you have to check the “no” box. Other than that, you also have to check “no” for the following events:
- Transfer crypto tokens, coins, or NFTs from one wallet or account to another.
- Buying bitcoins with US money or through online payment channels like PayPal and Venmo.
The Bottom Line
If you ticked “yes” to the crypto question in the tax form, it’s best to report your taxes on time. If it becomes too much of a task for you, you can easily take the help of crypto tax software like ZenLedger to file your taxes in a seamless and error-free manner.
FAQs
- How much tax do you pay crypto?
For long-term crypto taxes, you will have to pay 0% to 20% depending on your overall income. And when it comes to short-term crypto taxes, you will have to pay 10% to 37% depending on your overall income.
- Is crypto taxed in the US?
According to Notice 2014-21, cryptocurrency is classified as property by the IRS, and cryptocurrency transactions are taxed just like any other property transaction. Whenever you sell, trade, or dispose of bitcoin in any manner and make a profit, you will have to pay taxes.
- Can the IRS track Bitcoins?
Yes, absolutely! The IRS gets notified that you have reportable bitcoin transactions, thanks to a matching mechanism built into the Information Reporting Program (IRP) of the IRS.