The April 18 tax deadline is just weeks away, and for many Americans it will be the first time they answer questions about cryptocurrencies on their tax returns.
Crypto traders and NFT buyers and sellers will need to report their gains to the Internal Revenue Service so that they can be properly taxed. But it can be confusing to know if you owe taxes on your bitcoin, dogecoin, ether and other currencies, especially with the tricky cryptocurrency question that's included on every tax return.
For the second straight year, the first item taxpayers will encounter on their 1040 forms after filling out their contact information is a question asking if "at any time during 2021, did [they] receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency."
It's a question that is easy to answer if you understand what the IRS is trying to find out, says Austin Woodward, a certified public accountant and CEO of crypto accounting platform TaxBit.
"If you just bought it and didn't sell anything, you can actually answer 'no' to that question because you do not have any taxable gains or losses to report," he says.
But if you bought and sold cryptocurrency, or otherwise spent your crypto or exchanged it for other digital tokens, you must respond "yes" to the question.
That's because under U.S. tax law, bitcoin and other cryptocurrencies are classified as property and subject to capital gains taxes, meaning that you owe taxes on the increase in value of your property from when you first bought it. But you only owe taxes when those gains are realized.
"Any time you sell a cryptocurrency or trade it for another form of property, or if you're using it for a means of payment, you are incurring a taxable event," Woodward says.
The amount you will owe depends on how long you held your cryptocurrency, and whether you sold or exchanged it for a profit or a loss. If you owned your crypto for under a year, the taxes you pay on any gains will be the same as your normal income tax rate.
If you owned your crypto for more than a year, you will pay along-term capital gains tax rate, which is determined by your income. For single filers, the capital gains tax rate is 0% if you earn up to $40,400 per year, 15% if you earn up to $445,850 and 20% if you make more than that. ThisIRS worksheetcan help you do the math.
Investors who sold or exchanged their crypto at a loss — for example, buying bitcoin at $60,000 and selling it at $30,000 — can use their losses to lower their taxable income by a maximum of $3,000. Any additional losses can be carried over to future years.
Woodward encourages anyone who has incurred losses to be proactive about reporting them to the IRS, no matter how small. Failing to do so, he warns, could result in an IRS audit.
"They have a lot of infrastructure and teams in place to go after known cryptocurrency users that don't report," he says. "There might be some costs associated with navigating an audit that you would otherwise not want to go through if you had just reported your losses."
Whatever you do, make sure you don't fail to report any crypto transactions to the IRS, Woodward says. Tax returns are signed under the penalty of perjury, and it is possible that you can be caught lying to the IRS.
"I think one of the misconceptions of crypto is that it's anonymous and there's not a record of who's using it and what's happening," he says. "You should report under the assumption that the IRS knows about it anyway."
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FAQs
No, you do not need to report crypto if you don't sell. Because cryptocurrency and other digital assets are treated as property, taxable events only occur when you realize capital gains or losses through events such as swapping, trading, selling for fiat, or other methods of disposal.
What happens if I don't report my crypto on taxes? ›
If you don't report a crypto-taxable event, you could incur interest, penalties, or even criminal charges if the IRS audits you. You may also even receive a letter from the IRS if you failed to report income and pay taxes on crypto, or do not report your transactions properly.
How do you answer IRS crypto question? ›
In other words, if you simply held your cryptocurrency and did not make any sales or earn any crypto income during the 2022 tax year, you do not need to answer 'Yes' to the Form 1040 question. However, you should check 'Yes' if you've gifted crypto to a friend or family member.
What amount of crypto needs to be reported on taxes? ›
You owe taxes on any amount of profit or income, even $1. Crypto exchanges are required to report income of more than $600 for activities like staking, but you still are required to pay taxes on smaller amounts.
Does the IRS know if you traded crypto? ›
Yes. A variety of large crypto exchanges have already confirmed they report to the IRS. Back in 2016, the IRS won a John Doe summons against Coinbase. A John Doe summons compels a given exchange to share user data with the IRS so it can be used to identify and audit taxpayers, as well as prosecute those evading taxes.
Will I get audited if I don't report crypto? ›
Crypto exchanges can issue you three tax forms: Form 1099-K, Form 1099-B, and Form 1099-MISCs. If you don't report the amounts reported on these forms on your tax return, you will receive a CP2000 letter and be subject to a correspondence audit.
Do I have to report small crypto on taxes? ›
The IRS treats cryptocurrency as “property.” If you buy, sell or exchange cryptocurrency, you're likely on the hook for paying crypto taxes. Reporting your crypto activity requires using Form 1040 Schedule D as your crypto tax form to reconcile your capital gains and losses and Form 8949 if necessary.
How does the IRS audit crypto? ›
All this to say, if the IRS wants to know about your crypto transactions - they have many means to do so. They use previous tax returns, your financial records and any KYC data they have access to to identify you and audit you.
Do I need to report crypto if I made no money? ›
It's important to note: you're responsible for reporting all crypto you receive or fiat currency you made as income on your tax forms, even if you earn just $1.
How likely is it that the IRS will audit me for crypto? ›
Most crypto tax filers will not be audited, but some will. The best way to prepare for possibility of a crypto tax audit is to keep thorough records of all crypto transactions and any related communications.
If the IRS has your records from an exchange and you haven't reported crypto on your tax returns—or if what you reported doesn't match the IRS's records—this could trigger a cryptocurrency audit or worse.
How does the IRS know I made money on crypto? ›
In addition, exchanges like Coinbase, Gemini, and Kraken issue 1099 forms to customers and to the IRS reporting on your crypto transaction activity. If you don't report transactions that have been reported to the IRS via Form 1099, you may automatically be sent a warning letter about your unpaid tax liability.
Do I have to report crypto if I made less than 10k? ›
The short answer is yes. The more detailed response is still yes; you have to report and potentially pay taxes on any crypto transaction that results in a taxable event with gains or losses. While not every crypto transaction is a taxable event, many are.
Do you have to pay taxes on crypto if you reinvest? ›
This is considered a disposal event subject to capital gains tax. Do you have to pay taxes on crypto if you reinvest? If you disposed of your cryptocurrency and then reinvested your funds, you'll still be required to pay capital gains tax on your disposals.
Will Coinbase send me a 1099? ›
Coinbase issues an IRS form called 1099-MISC to report miscellaneous income rewards to US customers that meet certain criteria. You can find all of your IRS forms in the Documents section of your Coinbase Tax Center. Coinbase no longer issues an IRS Form 1099-K.
Why does the IRS ask if I bought cryptocurrency? ›
The IRS considers cryptocurrency holdings to be “property” for tax purposes, which means your virtual currency is taxed in the same way as any other assets you own, like stocks or gold.
Can IRS see crypto accounts? ›
Yes, the IRS can track crypto as the agency has ordered crypto exchanges and trading platforms to report tax forms such as 1099-B and 1099-K to them. Also, in recent years, several exchanges have received several subpoenas directing them to reveal some of the user accounts.
Do I have to report small crypto losses? ›
Reporting crypto losses using form 8949 and 1040 Schedule D is required by the IRS. Claiming crypto losses on your tax return may allow you to deduct them from your income or offset capital gains, lowering your tax liability.
How do I not get audited crypto? ›
How to avoid a cryptocurrency audit
- Accurately report your crypto earnings. Some of the crypto information that investors should report to avoid an audit include:
- Explain steep rises/falls in income. ...
- Double check your tax return. ...
- Don't over-report your home deductions.
How to Legally Avoid Crypto Taxes in 2022
- Hold on.
- Take advantage of tax-free thresholds.
- Offset gains with losses.
- Invest crypto into an IRA, pension or annuities fund.
- Use the annual gift tax exclusion.
- Change your tax rate.
- Donate to charity.
- Offload crypto assets to your spouse.
First, many cryptocurrency exchanges report transactions that are made on their platforms directly to the IRS. If you use an exchange that provides you with a form 1099-K or form 1099-B, there is no doubt that the IRS knows that you have reportable cryptocurrency transactions.
Do I have to report crypto if I sold less than 600? ›
If you earn $600 or more in a year paid by an exchange, including Coinbase, the exchange is required to report these payments to the IRS as “other income” via IRS Form 1099-MISC (you'll also receive a copy for your tax return).
At what point does Coinbase report to IRS? ›
Coinbase reports your cryptocurrency transactions to the IRS before the start of tax filing season. As a Coinbase.com customer, you'll receive a 1099 form if you pay US taxes and earn crypto gains over $600.
Why didn t Coinbase send me a 1099? ›
Does Coinbase Issue 1099-Ks and Report to the IRS? No, they stopped issuing the 1099-K form from the year 2021. Thus, they don't report this form to the IRS. Form 1099-K is issued if you received gross payments of more than $20,000 from third-party payment network transactions or credit card transactions.
Does Coinbase still report to IRS? ›
As the name suggests, your gain/loss report is a roundup of every transaction you made on Coinbase that resulted in a capital gain or loss, like selling, spending, or converting crypto. Note: today, Coinbase won't report your gains or losses to the IRS.
Do I have to report crypto if I made less than 600? ›
If you earn $600 or more in a year paid by an exchange, including Coinbase, the exchange is required to report these payments to the IRS as “other income” via IRS Form 1099-MISC (you'll also receive a copy for your tax return).
Do I need to report crypto if I didn't sell? ›
Yes, there are several scenarios where you receive income as cryptocurrency, which needs to be reported even if you don't sell it. For example, if you receive crypto from earning interest, staking rewards, an airdrop, or a salary, you need to report that income, even if you don't sell the coins you received.
Do I have to report small amounts of crypto? ›
People might refer to cryptocurrency as a virtual currency, but it's not a true currency in the eyes of the IRS. According to IRS Notice 2014-21, the IRS considers cryptocurrency to be property, and capital gains and losses need to be reported on Schedule D and Form 8949 if necessary.
Do I have to report 20$ crypto on taxes? ›
The IRS treats cryptocurrency as “property.” If you buy, sell or exchange cryptocurrency, you're likely on the hook for paying crypto taxes. Reporting your crypto activity requires using Form 1040 Schedule D as your crypto tax form to reconcile your capital gains and losses and Form 8949 if necessary.
Which crypto exchange does not report to IRS? ›
Which crypto exchanges do not report to the IRS? Currently, centralized exchanges like KuCoin and decentralized exchanges like Uniswap do not collect KYC (Know Your Customer) information from users.
Yes. Coinbase reports your cryptocurrency transactions to the IRS before the start of tax filing season. As a Coinbase.com customer, you'll receive a 1099 form if you pay US taxes and earn crypto gains over $600. Yes.
