As the value of cryptocurrency rises, so does the demand for it, particularly Bitcoin. The growing number of cryptocurrency traders require greater due diligence on how to determine and calculate their cryptocurrency taxes under IRS rules.
Below are some general tax considerations for virtual currencies that a taxpayer should be mindful of:
- How is cryptocurrency treated for Federal income tax purposes?
Cryptocurrency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.
- How do I determine my basis in cryptocurrency I purchased with real currency?
Your basis (also known as your “cost basis”) is the amount you spent to acquire the cryptocurrency, including fees, commissions, and other acquisition costs in U.S. dollars. Your adjusted basis is your basis increased by certain expenditures and decreased by certain deductions or credits in U.S. dollars.
- Will I recognize a gain or loss when I sell my cryptocurrency for real currency?
A capital gain or loss is commonly recognized when a taxpayer sells or trades cryptocurrency, which is a capital asset in possession. Capital assets include stocks, bonds, and other types of investment property. Ordinary income frequently occurs when a taxpayer sells or trades virtual money that isn’t a capital object in his or her possession.
- The 2021 Form 1040 asks whether at any time during 2021, I received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. During 2021, I purchased virtual currency with real currency and had no other virtual currency transactions during the year. Must I answer yes to the Form 1040 question?
If your only transactions involving virtual currency during 2021 were purchases of virtual currency with real currency, you may not be required to answer yes to the Form 1040 question. However, we would advise caution as the rules can be very complex and are continuously being updated. You may contact your tax adviser to understand more about your reporting requirements regarding virtual currency transactions.
Disclaimer: This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors or consult us regarding your own personal tax situation as this email was intended to be general in nature.