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The crypto guide to taxes

The crypto guide to taxes

Dust off your grade school calculator and grab the strongest cup of coffee you’ve got: it’s time to figure out your taxes. [Constantine Johnny via Getty Images]

April 18 is just a few short weeks away, but there’s no need to stress — we’re here to help you know what to expect from your crypto taxes in this special edition of Coinbase Bytes.

Crypto tax basics to help you start. Let’s review what kinds of crypto activities you need to report.

The rundown on NFT taxes. Curious how your exclusive ape-themed avatar impacts your taxes? Allow us to explain. 

Strategies to minimize next year’s tax bill. Give yourself the greatest gift at all: A less stressful 2022-2023 tax season. 

BRASS TAX

Which crypto transactions are taxable (and which aren’t!)

If you’re one of the 16 percent of Americans who say they’ve used crypto, and you’re unsure how to report certain transactions on your federal income tax return, now’s the time to learn. The last thing you want is an “educational” letter from the Internal Revenue Service (IRS) asking for back taxes or interest because of improperly reported crypto transactions. With our help, you’ll be able to file confidently and set yourself up for success. Here are some key basics you’ll need to know.

  • Many types of crypto transactions are taxable events, each with its own set of rules and exceptions. If you sold, converted, spent, earned, or staked crypto, for example — you’ll need to report your transactions to the IRS. 

  • The money you gain from crypto is taxed at different rates, either as capital gains or as ordinary income, depending on how you got your crypto and how long you held on to it, among other factors. The IRS treats selling crypto a lot like selling stock — you’ll generally pay a lower rate if you held onto it for a year or more before you sold it.

  • Converting crypto, like swapping BTC for ETH, is taxable. This is because you’ve technically sold your BTC to buy ETH, “realizing” either a gain or a loss. Same goes for spending. If you bought $10,000 in BTC and, after its value increased to $30,000, used your BTC to buy a car worth $30,000 — you’ll have a taxable gain.

  • Simply buying crypto with cash isn’t taxable, so you won’t have to report it on your federal tax return. You also won’t need to report transferring coins between wallets you own or gifting up to $15,000 (for 2021) in crypto to a friend or family member. And if you’ve donated crypto directly to a 501(c)(3) charitable organization, you might even be able to claim a deduction according to the latest IRS guidance.

Why it matters…. It’s important (and legally required!) to report your activity and pay the necessary taxes. The penalty for getting this wrong may be steep, so be sure to consider all your crypto transactions. If you’re a Coinbase user, check out our tax reports and tools, or use a trusted aggregator like CoinTracker to organize your taxable crypto activities. And if you’re having trouble navigating your tax situation on your own, please consult a professional.

NON-FUNGIBLE TAXES

How are NFTs taxed? A guide for collectors, creators, and investors

NFTs had a pretty big year in 2021. How big? The acronym “NFT'' didn't just make it into the dictionary — Merriam-Webster literally auctioned off the definition in NFT form for a cool 15 ETH (about $60,000 at the time). Amid the hype, however, you might have missed a less scintillating, but equally important part of the story: the federal tax implications of buying, selling, and minting NFTs. The IRS hasn't yet issued any NFT-specific guidance — so how do you properly report your NFT activity on your tax returns? Let’s dig in.

  • A couple specific NFT activities aren’t taxable events. If you bought an NFT with cash, or minted and held a piece of art you created, you’re in the clear. These actions don’t count as taxable events, and you don’t have to report them to the IRS on your tax return. 

  • Buying an NFT with crypto is a taxable event. In this case, you’ve technically sold your crypto, and then used the proceeds to buy an NFT. This is taxable, and you’ll need to report capital gains or losses from your sale of crypto. 

  • Money you earn from selling NFTs is generally treated like capital gains, and taxed like earnings from the sale of more typical capital assets (like property, stocks, or bonds). How much you’ll pay in taxes depends on a few factors: how long you held the NFT, the type of NFT, your total annual income, whether you had a gain or a loss, and more. 

  • If you sell an NFT you minted, you’ll need to report your earnings to the IRS, so they can tax you at your ordinary income rate. You may also need to pay a self-employment tax if you created that NFT as part of your profession or business. You’ll also need to report any royalties you might earn if your NFT sells again.

Why it matters… NFTs may now be mainstream news, but to the IRS, these digital collectibles are still a brand new asset class. There’s plenty of ambiguity and nuance to the rules — for example, if the IRS considers the NFT you sold to be a work of art, it could apply the maximum 28% capital gains rate for collectibles. What’s considered a work of art, you ask? When it comes to NFTs, the IRS still hasn’t provided clear-cut guidance. That’s why it’s a good idea to consult a tax advisor, and make sure you’re reporting NFT activity as accurately as possible. 

FUTURE SELF CARE

Three popular strategies for minimizing next year’s tax bill

Was your 2020-2021 tax bill an unwelcome surprise? The good news is it’s never too early to get ahead of next year’s return by considering a few common strategies now. With some careful planning, you may be able to minimize the federal taxes you pay on your crypto or other asset sales in 2022. Here are three strategies to consider: 

  • Know how long you’ve held your crypto. If you’re looking to reduce capital gains tax, it could be a good idea to sell assets you’ve had for more than a year first. Why? In general, if you hold your crypto for more than a year, your gains will be taxed at a lower, long-term capital gains rate. If you hold for less than a year, you’ll be taxed at a higher, ordinary income tax rate. 

  • Make losses work in your favor. Your crypto losses aren’t all bad news — you can, with some limitations, use them to your advantage. If you have more capital losses than gains, for example, you can use up to $3,000 a year to offset other gains. This amount carries over to future years, indefinitely. 

  • Try donating to charity. It may make financial sense to donate some of your appreciated crypto. Instead of selling at a gain, you can skip paying capital gains tax on the sale and support a cause at the same time.

RETURN TO FORM

Can’t tell a 1099 from an 8949? A quick guide to common crypto tax forms

The IRS isn’t exactly known for its user-friendly terminology, but there are a few key terms (The agency also refers to crypto as “virtual currency.”) and forms you should be familiar with when you’re organizing your crypto taxes. Let’s take a look at some of the most common.

  • Form 1040: Also known as the U.S. Individual Income Tax Return. This form is used to determine your total taxable income. 

  • Form 1040 Schedule D: Commonly referred to simply as “Schedule D" — this form is the part of your tax return that summarizes your capital gains and losses.

  • Form 1099-MISC: Use this form to report “miscellaneous income” — income from staking, airdrops, and more — to the IRS. This is also the only form Coinbase will provide — specifically for users with $600 or more in crypto income from activities like rewards or airdrops.

  • Form 8949: Use this form to report any capital gains or losses from selling, converting, or otherwise “disposing” of your crypto.

Have more questions about IRS terminology and forms? Check out their FAQ.

TOKEN TRIVIA

What’s the max amount of crypto you can give as a gift without needing to report it to the IRS in 2021?

A

$11.7 million

B

$15,000

C

1 bitcoin

D

None

Find the answer below.

Trivia Answer

B

$15,000