A few years ago when cryptocurrency was in its infancy, tax reporting requirements were murky at best, and many who profited off of Bitcoin, Ethereum and other digital currencies did so without ever receiving a tax bill. The landscape has changed dramatically in 2021. If you have bought, sold or traded crypto, you have the obligation to report those transactions to the IRS.
Crypto gains are capital gains
If you buy cryptocurrency and sell it at a higher price, you have made a capital gain and the government will tax it as such. Short-term capital gains (assets you sold less than a year after purchasing them) are taxed at a higher rate. In the fast-paced world of crypto trading, many transactions count as short-term gains, so you must carefully keep track of when you bought and sold your assets (certain computer programs can help you keep track of your transactions.)
An important note about trading cryptocurrency in the U.S.: Crypto-to-crypto transactions are taxable events. In other words, if you traded Bitcoin for Chainlink, for instance, and Bitcoin rose in value while you owned it, you are responsible for paying taxes on its increased value in U.S. dollars at the time you traded it. The same holds true if you bought something with a crypto debit card.
Crypto can also be regular income
The IRS will tax some of your crypto income as regular income. These taxable earnings include:
- Assets earned from staking or mining cryptocurrency
- Airdropped cryptocurrency
- Payments made to you or your business in cryptocurrency
Failure to keep up-to-date with the ever-changing world of crypto taxes can result in serious legal trouble with the IRS. By staying abreast of changes in crypto tax laws, and getting legal help when necessary, you can steer clear of any unnecessary problems with tax collection authorities.