The extended 2021 tax filing deadline (October 17, 2022) is fast approaching. If you still haven’t reported your cryptocurrency activities to the IRS, this is the last day you can do so without incurring penalties.
How are cryptocurrencies taxed?
Cryptocurrencies are taxed as property under IRS Notice 2014-21. This tax treatment gives rise to a taxable event whenever you withdraw, spend or exchange one cryptocurrency for another. Earning interest, staking rewards, mining revenue, and receiving airdrops are also taxable events.
Investors must pay capital gains taxes based on the difference between a coin’s selling price and its cost basis (how much you paid for it). Interest, staking, mining and airdrops are subject to ordinary income tax at the time of receipt.
You should also report cryptocurrency-related losses to your taxes. These losses can offset your income and increase your overall tax return.
Crypto is not invisible to the tax officer
Many people mistakenly believe that because blockchain transactions are pseudo-anonymous (or anonymous), regulators have no visibility into their own crypto activities. However, this is not the case, especially when it comes to centralized exchanges like Coinbase. The IRS is aware of cryptocurrency activity by exchanges that report to it (via 1099) and information gathered through subpoenas.
1099-Ks & 1099-Bs report crypto transactions
If you receive a Form 1099-K or 1099-B from a cryptocurrency exchange, the IRS likely knows that you have reportable cryptocurrency transactions. This fact is due to the “matching” mechanism embedded in the IRS Information Reporting Program (IRP).
Thats how it works. If you have more than $20,000 in revenue and 200 transactions on a crypto exchange during a tax year, you will receive a Form 1099-K detailing the revenue for each month. The exchanges must create these forms for the users who meet the criteria. A copy of this form will be provided to the account holder and another copy will go to the IRS. If you file a tax return and do not include these amounts, the IRS (Automated Underreporter (AUR)) computer system will automatically mark these returns as a tax refund. How to get crypto tax assessments like CP2000. If you receive a Form 1099-B or 1099-MISCs and do not report it, the same principles apply.
So if you receive a tax form from an exchange, the IRS already has a copy of it and you should definitely report it to avoid tax notices and penalties
The IRS also relies on subpoenas to obtain information about noncompliant taxpayers. For example, in 2018, Coinbase was required to disclose approximately 13,000 user accounts, including tax identification number, name, date of birth, address, account activity records, transaction logs, and any periodic account statements or bills (or equivalent) per John Doe’s subpoena. In 2021, the IRS issued Kraken & Circle subpoenas. In 2022, SFOX was subpoenaed to release information about certain crypto users.
What tax forms to submit?
Form 8949 & Appendix D
Form 8949 is used to report your cryptocurrency and NFT gains and losses. If you get a complete and accurate 1099-B from an exchange, you can enter those numbers on these forms. If you traded NFTs, you would need to rely on your manual records or connect your hosted (like Metamask or Phantom) wallet to cryptocurrency control software to get the numbers required to fill out this form.
The amounts reported to you by an exchange on Form 1099-MISC, such as B. Staking Earnings, Interest Earnings and Premium Earnings would appear in line 8z of Schedule 1. You must report this income even if you don’t receive tax forms.
Form 1040 Crypto Question
Finally, be sure to answer the cryptocurrency question (“Did you receive, sell, exchange, or otherwise dispose of any financial interest in virtual currency at any time during 2021?”) on the front and center of the Form 1040.
If you’ve been into cryptocurrency in 2021, you most likely need to tick yes to this broad question. That said, you can safely tick “no” if you only;
1) Coins held in a wallet during 2021 (Hodler)
2) Transferring coins from an exchange/wallet you own to another exchange/wallet account you own in 2021.
3) Cryptocurrency bought with USD in 2021.
- Gather your crypto tax records and submit the appropriate tax forms before the deadline to avoid penalties.
Disclosure: This report is for informational purposes only and should not be construed as financial or tax advice.