Last year, you probably started hearing about cryptocurrency all over the news. Digital currencies like Bitcoin, Litecoin, Dogecoin, and Ethereum have been gaining steam and legitimacy, as companies are now accepting and even investing in them. It was a big deal when Tesla bought $1.5 billion in Bitcoin in and Elon Musk announced that his company would start accepting it. And from 2010 to 2021, the value of one Bitcoin jumped from $.08 per coin to over $56,000 per coin.
If you bought any cryptocurrency in 2020 or prior years, you’re wondering how to report it on your taxes. After all, this is new tax filing territory for everyone, so it may be a bit confusing. By learning about reporting cryptocurrency, however, you can ensure your taxes are 100% accurate and you’re not risking being audited or owing more money.
Reporting Cryptocurrency on Taxes
Any time you make or lose money on your investments, you need to report it on your taxes. In the past, people who held cryptocurrencies may have not reported it. According to CNBC, in 2019, the IRS sent out letters to more than 10,000 taxpayers who had crypto transactions and might have not reported their income and paid the taxes they owed.
But this year, for 2020 taxes, the IRS has added a question about crypto to page one of Form 1040. Under the section where you put your name, address, and other personal information, it says, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Even if you held cryptocurrency but didn’t buy or sell it, you would still need to check “yes.”
Income and Gains
If you invested in cryptocurrency by buying and selling it, you would report all your capital gains and losses on your taxes on Schedule D, an attachment for Form 1040.
Remember that if you made money on crypto but held it for one year or less, then it’s a short-term capital gain and it would be taxed as income. Your tax rate would range from 10% to 37% depending on your tax bracket.
If you held and sold crypto for more than one year, then it would be taxed as a long-term gain. Those capital gains tax rates are 0%, 15%, or 20% depending on your 2020 income. And if you lose any money on your investment, you can use it against your other gains and income. The limit is $3,000, but you can carry the rest over to subsequent years when you file. This is a NET capital loss of $3,000 limit. So if you had $10,000 in other capital gains, and $15,000 in losses from crypto, you’d actually be able to claim $13,000 in capital losses on your return. the remaining $2000 would be carried forward.
Let’s say that someone paid you with cryptocurrency for performing a job. You also have to report that. If you are paid as an employee, then you need to pay ordinary income taxes, and if you are paid as a nonemployee, you need to pay ordinary income taxes along with self-employment taxes. If you mine crypto, you’ll need to record it and pay taxable income.
You may have donated your cryptocurrency to charity. As long as you gave your actual virtual currency to eligible charities and didn’t convert it to dollars, then you could potentially qualify for a reduced tax liability.
For more information on reporting virtual currency, the IRS put out Notice 2014–21, which gives detailed information on all different scenarios with crypto and how you would report them on your tax return.
Preparing Your 2020 Taxes
It’s up to you to include crypto earnings and losses when you file your 2020 taxes. There are many exchanges and brokers out there that provide you with outlets to buy and sell crypto, but they may not offer market records to you. Instead, you’ll need to keep your own records.
Whether or not you’ve reported cryptocurrency in the past, you can use TaxAct to complete your 2020 taxes before the deadline. You can use our Premier plan and report it on your own, or, if you have any questions, you can File With Xpert Help and enlist the assistance of a CPA and other tax experts. Then, you will be sure to file your taxes correctly when dealing with crypto.