If You Sold or Traded Bitcoin in 2021, the IRS Wants to Know About It

 Here's what you need to know about handling crypto and NFTs on your taxes this year.

With less than nine weeks to go until the 2022 tax deadline, cryptocurrency investors and enthusiasts are discovering that filing their taxes may be a bit more complicated this year.

The IRS is asking everyone filing a return this year about their cryptocurrency activity -- and that may be the first time that many people consider the tax implications of buying, selling and trading crypto.

 In a nutshell: The IRS treats virtual currencies, like bitcoin and ether -- and even NFTs -- differently from other assets and investments. There are specific rules you'll need to follow if you sold or traded those assets last year. But the right tax software can make it way easier to report all of your crypto activity correctly.

"The average investor needs to understand that cryptocurrency is not like any other type of currency out there. Cryptocurrency is treated as property for tax purposes," says Shaun Hunley, a tax consultant at Thomson Reuters. 

"So anytime you're going to use cryptocurrency or transact in cryptocurrency, you're going to have the potential for gain or loss on [your] tax return."

There's an important caveat, however. If you used fiat currency -- that is, US dollars -- to buy crypto assets in 2021, you don't have to report anything about it on your return. (For now, at least. This is a rapidly evolving realm of tax law, and US law in general.) 

Nonetheless, if you sold crypto, you'll need to report that on your return. And if you traded one cryptocurrency for another, that's going to need to be reported, too. 

Reporting gains and losses is fairly straightforward once you know the ropes, and there are tools to help you if you're not inclined to take on the math and accounting yourself. Read on to learn everything you need to know about handling cryptocurrency on your state and federal tax returns this year.

How is the IRS handling cryptocurrency on 2021 taxes? As it has been doing since 2019, the IRS will ask about your cryptocurrency for your taxes. 

This year the 1040 US Individual Income Tax Return form (PDF) features a question about crypto: "At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?" 

And though the IRS there is asking about receiving cryptocurrency as well, it's actually pretty focused on whether you unloaded it by selling or trading it. 

"If you're just purchasing cryptocurrency with US dollars, and that's all you do during the year -- you don't sell it, you don't exchange it, you just keep it in your wallet for the whole year -- you can check 'no' on that question," says Hunley. 

The IRS updated the FAQ page on digital currencies to underline this point, in the answer to a question about 2020 taxes: "If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question."

For now, the IRS regards bitcoin and other cryptocurrencies like property. So, if you bought bitcoin and held it all, you don't need to report that on your tax return.

"The bottom line is that the IRS is looking for taxable transactions. So if you have a taxable transaction, you should be checking 'yes.' If you have a nontaxable transaction, you're checking 'no,'" said Hunley.

So, if I just bought bitcoin (or another cryptocurrency) on Coinbase, for example, I don't need to report it? Correct. If you used US dollars to buy crypto on an exchange, or through a private transaction, there's no need to report it. 

OK, I sold some bitcoin. Do I need to report that on my taxes? Yes. Once you sell, and "realize" a gain or loss, you need to report it -- and pay taxes on any capital gains.

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