Is cryptocurrency here to stay, whether as a “digital asset” or an actual form of currency?
At this point, only time will tell. But crypto is here now. And the IRS is zeroing in on this financial instrument. A fact that’s of genuine concern to all tax filers currently trading or exchanging cryptocurrency.
Here’s what to watch out for…
New Standardized Crypto Question on 2021 Tax Forms
On this year’s 1040 standard form, you’ll find the following question near the top…
“At any time during 2021, did you receive, sell, exchange or otherwise dispose of any virtual currency?”
If you bought or held cryptocurrency with U.S. dollars or transferred digital assets between your wallets, your answer is “no.”
But if you sold crypto, exchanged one virtual currency for another, used it to purchase goods, received it as payment for services, or acquired it through mining, staking, or other means, your answer is “yes.”
Answering “Yes” Raises a Red Flag
While answering yes to the right thing to do if you traded or exchanged crypto, this admission will prompt the IRS to carefully review your Schedule D form, which is used to report the sale or exchange of a capital asset not reported elsewhere.
Reviewers are looking for some sort of gain or loss associated with your crypto trade. And if they don’t see such notations, the absence will likely trigger a formal review.
Hiding Crypto Transactions is Even Riskier
The government has promised to come down hard on tax filers who are discovered to have lied on their returns to obscure crypto transactions.
Failing to report can result in an IRS audit, incurring interest, penalties, and even criminal charges.
What to Know About Crypto And its Impact on Your Tax Return
While many cryptocurrency proponents are advocating for change, cryptocurrency is currently considered an asset.
And similar to stock, bonds, and other investment holdings, the basis of crypto’s value is determined by its original purchase price.
Thus, any trades — even if crypto is literally used as “currency” to pay for goods or services — that result in increased value can trigger capital gains taxes (depending on the length of asset ownership).
Capital Gains On Short-Term Crypto Sales For Single Filers… If you owned crypto for less than a year and earned over $40,400 on a trade, you’re subject to 15% capital gains taxes. And if you earned over $445,850, you’re subject to 20% capital gains taxes.
Capital Gains On Short-Term Crypto Sales For Joint Filers… If you owned crypto for less than a year and earned over $80,800 on a trade, you’re subject to 15% capital gains taxes. And if you earned over $500,600, you’re subject to 20% capital gains taxes.
Capital Gains On Long-Term Crypto Sales… If you owned crypto for more than a year and sold or exchanged it for a profit, your capital gains tax rate depends on the size of your profit and your overall tax bracket.
Have More Questions About Crypto?
If you traded or exchanged cryptocurrency in the 2021 fiscal year, it’s crucial that you take care in preparing your tax return, being sure to provide the required documentation.
To avoid any missteps that could result in an audit, I recommend getting in touch for a FREE consultation!
