It’s 2021, and all everyone seems to be talking about is crypto. We’ve seen Bitcoin explode into the $60K range and seen Elon Musk talk about Dogecoin on Saturday Night Live. Many people are getting involved, and if you’re one of them, it’s important to learn how crypto taxes work. Fortunately, we’ve got you covered.
If you’re looking for general information regarding cryptocurrency taxes, you can refer to our previous guide. This one will focus more on 2021 specific laws and regulations.
This Guide Contains:
How Are Cryptocurrencies Taxed?
Cryptocurrencies are categorized by the Internal Revenue Service (IRS) as property. This means they generally fall under capital gains tax, of which there are two kinds – short term and long term. Your rate also varies based on income bracket.
However, some types of crypto transaction require you to pay income tax rates, such as getting paid in cryptocurrency or mining.
You can read a more detailed description of income tax rates and income taxed transactions in our previous guide.
When do I Pay Taxes on Cryptocurrency?
If you’ve invested in cryptocurrencies before, you probably know the general taxable events:
- Converting a cryptocurrency to your local fiat.
- Converting one cryptocurrency into another
- Any earned cryptocurrency income.
- Purchasing a good or a service with cryptocurrency.
Then we have the non-taxable events.
- If you simply hold cryptocurrencies you’ve bought.
- Transferring cryptocurrencies between wallets.
However, cryptocurrencies have developed a lot since then. Decentralized finance (DeFi) and non-fungible tokens (NFTs) are now in the spotlight. If you’ve invested in either, here’s how to handle taxes:
NFT taxes are actually pretty simple. They’re taxed just like traditional crypto investments – as a property. If you invest in an NFT and sell it for a profit or a loss, you report it as a capital gain or loss. It’s that simple!
Note that traditional capital gains rules also apply when trading one NFT for another. Check out our NFT explainer guide here.
However, if you’re a creator of NFTs, know that you’ll be paying income tax on your, well, income. If anyone has paid you for art or other types of NFTs, be sure to report it as such.
DeFi taxes are a lot more complicated than NFTs, as there are many ways to get involved in the market.
For example, if you have lent out any money via cryptocurrencies and received interest in return, you would report those earnings as income tax.
That said, if you’ve contributed to a liquidity pool, such as Compound, and earned their token as a reward for your contribution, you would report it as capital gains tax. That’s because you’re technically converting one token to another. Yield farming would also fall under this tax report.
Remember it this way. If you acquire a new type of cryptocurrency, AKA a conversion, it’s likely a capital gains tax. If you’re earning on your invested asset, without it turning into another crypto, the transaction more likely to be an income tax.
On the other side of things, if you take out a cryptocurrency loan, you actually don’t have a taxable event on your hands. As of this writing, there’s no regulation on the interest you pay back on said loan. In fact, you can potentially use these transactions in a tax-deductible way. This may change in the future, though, as crypto regulations ramp up in the United States.
How Do I Pay Taxes on Cryptocurrencies?
Unlike in the traditional tax space, paying taxes on cryptocurrencies can be very confusing. You see, even if you buy on an exchange like Coinbase, the platform can’t necessarily send you transaction reports.
This is due to the inherent nature of digital assets. You’re sending cryptocurrencies all over the place, and an exchange doesn’t always know when you acquired them and at what price.
Sure, if you do all of your buying, selling, and converting on Coinbase, they can track the activity accurately. However, almost nobody sticks with one exchange, and it’s safer to move your funds off of an exchange wallet if holding.
Instead, make sure to record every single transaction you make. Take down its cost at the time of purchase, as well as any gains or losses they make when you sell.
Of course, you can track your transactions through cryptocurrency tax software. This article provides the necessary guidance.
That’s about it when it comes to new types of cryptocurrency taxes. Again, if you’re entirely new to crypto, make sure to combine this information with the previous article if it applies to you.