The IRS will ask every taxpayer about crypto transactions this tax season — here’s how to report them

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Cryptocurrencies, also known as virtual currencies, have gone mainstream. that’s for sure. For example, you can use bitcoin BTCUSD,
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To buy Tesla TSLA,
+3.93%
and many other things to buy or pay for. However, using cryptocurrencies has federal income tax implications. If you transacted crypto last year, here’s what you need to know on your 2021 tax return time.

Understand this: the IRS wants to know about your crypto transactions
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The 2021 version of IRS Form 1040 asks whether you have received, sold, exchanged or otherwise disposed of any financial interest in any virtual currency at any time during the year. If you did, you must check the “Yes” box. The fact that this question appears just below the lines on page 1 of Form 1040 to supply basic information like your name and address, shows that the IRS is serious about enforcing compliance with applicable tax rules. Fair warning.

When to Check the ‘Yes’ Box on Crypto Transactions
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The 2021 Form 1040 instructions clarify that virtual currency transactions for which you must check the “Yes” box include but are not limited to: (1) Virtual currency as payment for goods or services provided by you The realization; (2) the free receipt or transfer of virtual currency that does not qualify as an actual gift under federal tax rules; (3) the receipt of new virtual currency as a result of mining and mortgage activities; (4) receipt of virtual currency as a result of a hard fork; (5) the exchange of virtual currency for property, goods or services; (6) exchange/trading of virtual currency for any other virtual currency; (7) the sale of virtual currency; and (8) any other disposition of financial interest in virtual currency.

If in 2021 you disposed of any virtual currency held as a capital asset through sale, exchange, or transfer, check the “Yes” box and enter the familiar IRS form to find your capital gain or loss. Use Schedule D of 8949 and Form 1040. , See examples 1 and 4 below.

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If in 2021 you have received any virtual currency as compensation for services, check the “Yes” box and report the income the same way you would report other income of the same nature. See Example 3 below.

When to check the ‘No’ box on crypto transactions

You cannot leave the question of virtual currency transactions unanswered. You must check either the “Yes” box or the “No” box.

Transactions involving virtual currency do not include holding virtual currency in a wallet or account, or transferring virtual currency from a wallet or account that you own or control. If that’s what happened last year, check the “No” box.

Also check the “No” box if your only virtual currency transactions in 2021 were the purchase of virtual currency for real currency, including the use of a real currency electronic platform such as PayPal PYPL,
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main point: For more information about the federal tax treatment of virtual currency transactions, see Frequently Asked Questions on the IRS Website,

How to Report Crypto Profit and Loss on Your 2021 Form 1040

Now for the meat of this pillar. Despite what the IRS says, let’s use the term cryptocurrency instead of virtual currency. Ahead.

The IRS takes the position that cryptocurrency is “property” for federal income tax purposes. (sOur: IRS Notice 2014-21.) This means recognizing a taxable gain or loss to you whenever you exchange US dollars, euros, goods or services, real estate, a new Tesla, a different cryptocurrency, or whatever cryptocurrency and should report.

If you fail to report cryptocurrency transactions on your Form 1040 and get audited, you could face interest and penalties and even criminal prosecution in extreme cases.

To arrive at the federal income tax results of a cryptocurrency transaction, the first step is to calculate the fair market value (FMV) of the cryptocurrency, measured in US dollars, based on the date you received or paid for it.

The current prices of the most popular cryptocurrencies are listed on exchanges, and I hope you kept track of what they did last year. For example, bitcoin and a bevy of other cryptocurrencies are listed on Coinbase Coin,
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transaction. According to the Coinbase exchange, if you sold one bitcoin on 9/5/21, you should have received around $51,750. Maybe you actually got a little more or a little less. If you bought one bitcoin with US dollars on 9/5/21, you should have paid around $51,750. You may have actually paid a little more or a little less. Your basis will be what you paid for in bitcoin for federal income tax purposes.

* If the FMV you receive in exchange for cryptocurrency holdings exceeds your tax base in the cryptocurrency you exchange, you will receive tax benefits.

* You will suffer tax loss if the FMV you receive is less than your Aadhaar.

main point: Unless you are in the business of trading cryptocurrencies, it is hard to imagine that holding a cryptocurrency would be classified as anything other than a capital asset for federal income tax purposes – even if you used it to conduct business or personal transactions. It is strictly for investment, as opposed to holding. Therefore, a taxable gain or loss from exchanging cryptocurrency will almost always be a short-term capital gain or loss or a long-term gain or loss, depending on whether you held the cryptocurrency for at least one year and one day. Yes or No. term) or not (short term) before using it in the transaction.

Tax treatment of crypto receipts

If you accept cryptocurrency as payment for something, you will need to determine the FMV of the cryptocurrency on the date of the transaction and then convert the transaction to US dollars. Then calculate your federal income tax results.

Example 1: Last year, you exchanged two bitcoins for a different cryptocurrency. On the date of exchange, the FMV in US Dollars was $125,000 of the new cryptocurrency you received. Your tax base was $95,000 in the two bitcoins you left. You previously acquired two bitcoins in 2021. Your taxable gain on the exchange was $30,000 ($125,000 – $95,000). Report $30,000 as short-term capital gain on your 2021 Form 1040, using Form 8949 and Schedule D, because you have two bitcoins held for less than a year and a day.

Example 2: Last year, you sold a vintage auto that you restored to perfection for two bitcoins. According to the Coinbase exchange, at the date of the sale, bitcoins were worth $55,000 each. Your tax base in autos was $65,000. To report this transaction on your 2021 Form 1040, convert the two bitcoins you received to US dollars ($55,000 x 2) = $110,000. Your taxable profit on the sale is $45,000 ($110,000 – $65,000). Report $45,000 as income or profit on your Form 1040. Assuming that you are not in the business of restoring old autos, you have a short-term or long-term capital gain, depending on where you owned the auto. Report the profit on Form 8949 and Schedule D.

Tax treatment of crypto used in business transactions

If you receive cryptocurrencies as a form of payment at your business, the first step is to convert the payment to US dollars. Then follow the general rules for determining federal income tax results.

Example 3: You are a self employed professional. You operate your business as a single-member LLC that is treated as a sole proprietorship for tax purposes. Last year, you accepted a bitcoin as payment from a major customer. According to the Coinbase exchange, at the date of receipt, bitcoins were worth $55,000 each. On your 2021 Schedule C, you must recognize $55,000 of taxable income for services provided. Because you are self-employed, $55,000 is also subject to the dreaded self-employment tax.

If you use cryptocurrency to pay for a business expense, the first step is to convert the expense into US dollars. Then follow the general rules for determining federal income tax results.

Example 4: Last year, you used 1 bitcoin to purchase tax-deductible supplies for your thriving sole proprietorship business. At the date of purchase, each bitcoin was worth $55,000. So, you have a 2021 business deduction of $55,000. Include $55,000 as an expense on your 2021 Schedule C.

But there is another part to this transaction: tax gains or losses from holding bitcoin and then spending it. Let’s say you bought bitcoin in January 2021 for just $31,000. So, the increase in the value of bitcoin gave you a taxable profit of $24,000 ($55,000 – $31,000). This $24,000 gain is a short-term capital gain – because you haven’t held bitcoin for more than a year. Report the profit on Form 8949 and Schedule D.

If you use cryptocurrency to pay employee wages, the currency’s FMV counts as wages subject to federal income tax withholding, FICA tax, and FUTA tax. Like any other wages paid to employees, you must report wages to the employee and to the IRS on Form W-2.

If you use cryptocurrency to pay an independent contractor to perform services for your business, the FMV of the currency is subject to self-employment tax for the contractor. If that contractor is paid $600 or more during the year, you must report the payment on Form 1099-NEC.

As shown in Example 4, you could also have a tax gain or loss due to the increase or fall in the value of the cryptocurrency than when you held it before paying as cover…

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