Made a killing with crypto in 2021? Tips on how to calculate your tax invoice
The crypto ecosystem has expanded significantly in recent years. As institutions like the IMF begin to welcome his innovation, they are also urging investors to exercise caution.
Jakub Porzycki | NurPhoto via Getty Images
After a record year for cryptocurrencies in 2021, many investors could soon face a heavy tax burden for their happiness.
The market value of digital assets surged to over $ 2 trillion, with Bitcoin hitting an all-time high of over $ 69,000 in November and Ether rising to nearly $ 5,000 over the same period.
While prices plummeted in December, many investors were still seeing significant year-over-year growth.
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“Be prepared to pay some tax,” said Registered Agent Adam Markowitz, vice president of Howard L Markowitz PA, CPA in Leesburg, Florida.
But calculating your balance can be tricky, he said, especially if it’s been a year of heavy trading.
Since cryptocurrency is considered property, it can be subject to capital gains when exchanged or sold at a profit.
Converting digital coins, cashing out in US dollars, or making a purchase may be a taxable event, said Matt Metras, a registered agent and cryptocurrency tax specialist at MDM Financial Services in Rochester, New York.
Profit or loss is the difference between your purchase price, called the base, and its value when it was sold or exchanged, and the tax rates depend on how long you owned the coin.
If you hold the currency for more than a year, you may be eligible for long-term capital gains rates of 0%, 15%, or 20% depending on your taxable income.
However, selling or swapping assets after less than a year triggers short-term capital gains with regular income tax rates of up to 37% for top earners.
And many crypto investors frequently trade digital coins, according to a CNBC survey, with around a third trading weekly or monthly and nearly a quarter daily.
Lack of reporting
One of the biggest challenges with crypto tax is that many investors keep no record of transactions and it is difficult for exchanges to keep track of assets between wallets and brokers.
For example, if you bought bitcoin on Coinbase, transferred it to your wallet, and then moved it to Gemini, the second exchange wouldn’t know the original purchase price, Metras said.
While the deadline for Form 1099-B, which brokers use to report an investor’s profits and losses, is January 31, it is unclear which crypto exchanges, if any, will send these forms in 2021.
Despite limited reporting, the IRS still expects you to report crypto transactions, Markowitz said.
How to calculate crypto taxes
If exchanges do not provide Form 1099-B, you may be left with each broker’s transaction tables or other reporting options that are still difficult to negotiate.
“It’s best to try reverse engineering,” Metras said.
You can reconstruct records by importing each exchange’s files into crypto tax reporting software.
“It’s overwhelming when it’s a big mess,” Metras said. “But it all adds up at some point.”
There are several companies that can provide the 8949 form to summarize the crypto activity and submit your returns, Markowitz said.
However, errors can be possible and the reporting may not be enough for an IRS audit, he added.