Sold Crypto in 2021? 5 Things to Know About Your Taxes

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  • Cryptocurrency is considered property, so cryptocurrency transactions are taxable.
  • You need to report your gains when you make money on crypto, but you can also deduct your crypto losses.
  • Transactions are reported on Form 8949, and some tax software now offer crypto reporting features.

Taxes are more complicated when you have crypto sales to report, but doing it correctly beats getting a fine from the IRS.

With so many cryptocurrencies hitting all-time highs in 2021, there were plenty of investors who decided to cash in. If you were one of them, you'll need to make sure you have your crypto taxes in order when you file this year.

The IRS has made it clear that crypto is taxed just like any other type of property. Those who don't report their trades, whether intentionally or because they didn't keep accurate records, are at risk of interest and penalties. In extreme cases, there could even be criminal charges.

No one wants fines or jail time over their crypto. To help you file your taxes correctly, here are five of the most important things you need to know if you sold crypto last year.

1. You're required to pay capital gains taxes on crypto sales

If you sold cryptocurrency for more than you paid for it, you need to pay capital gains taxes. For example, if you bought Bitcoin (BTC) at $45,000 and sold at $55,000, then you need to report and pay taxes on the $10,000 you made.

The amount you pay is based on your income bracket and how long you owned the crypto before selling it. On crypto you owned for 365 days or less, you pay short-term capital gains taxes. Those are taxed the same as income. On crypto you owned for more than 365 days, you pay long-term capital gains taxes.

Long-term capital gains taxes depend on income, and most taxpayers end up paying 0% or 15%. It's better to hold investments for over a year whenever possible, because long-term capital gains have lower tax rates than short-term gains.

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2. If you lost money on a sale, you can deduct it

If you sold cryptocurrency for less than you paid for it, you can deduct the loss on your taxes. You can use that capital loss to either lower your capital gains or reduce your ordinary income.

With capital gains, you can use capital losses to offset what you made. Let's say you made $15,000 in profit selling Ethereum (ETH) in 2021, but you also lost $13,000 on Dogecoin (DOGE). You'd report both on your taxes, and you'd owe $2,000 in capital gains ($15,000 in gains minus $13,000 in losses).

The rules are a little different if you lost more than you made. You can use capital losses to lower your income by up to $3,000 if you're single or married filing jointly (the limit is $1,500 if you're married filing separately). If you have more than that, you can carry the excess losses forward to later tax years.

3. Selling isn't the only time you're taxed on crypto transactions

This is where cryptocurrency taxes get more complicated. You don't just owe taxes if you sold crypto for cash; you also need to report and pay taxes on any other transaction where you made money on your crypto. Here are a couple common examples:

  • You bought goods or services with your crypto. For example, you bought Bitcoin for $40,000, the price went up, and you later used it to buy a $50,000 Tesla. That's $10,000 in taxable gains.
  • You trade one cryptocurrency for another. Let's say you bought Bitcoin for $40,000, and after a price increase, you traded it for $50,000 worth of Ethereum. Once again, that's $10,000 in taxable gains.

As you can imagine, piecing together what different cryptos were worth a year after you traded them can be challenging. That's why recording as you go is one of the moves every crypto investor should make.

4. You report crypto transactions on Form 8949

Form 8949 is the tax form used to report sales of capital assets, including cryptocurrency. For every taxable crypto transaction you had, you'll need to provide the following:

  • Cryptocurrency name
  • Date you purchased it
  • Date you disposed of it (sold, trade, or used it in some other way)
  • Sales price
  • Cost basis (the amount you paid for it)
  • Gain or loss

Many popular tax software, including TurboTax and H&R Block, now support crypto transactions. Even on software that don't, you can normally report crypto transactions the same way you'd report stock sales.

5. Crypto exchanges may not send you tax forms (yet)

You can't rely on crypto exchanges to send you tax forms. Although many top crypto exchanges send 1099 forms to clients who meet trading minimums, not all of them do this. And some types of 1099 forms don't include a full record of your trades.

Remember, whether you receive tax forms doesn't determine if you owe crypto taxes. If you sold crypto and made money on it in 2021, you need to pay taxes on the gains. That's why you should keep good records of all your crypto transactions.

The U.S. government recently passed a bill that requires crypto exchanges to issue a Form 1099 for all their customers, starting with the 2023 tax year. Once that happens, it should make reporting crypto gains and losses easier.

It will probably take longer to do your taxes this year if you have crypto trades to report. That's time well spent, because it will help you avoid any issues with your taxes later.

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