Doing Taxes By Yourself

Doing Taxes By YourselfPin

When Doing Taxes by Yourself Where Do I Report Cryptocurrency?

Many of you heard the term cryptocurrency a few years ago, and may have wondered if you were on a different planet. No, it’s not real currency backed up by gold bullion, but a virtual currency. Before we get into our main topic of how and where to report crypto transactions when you’re doing taxes by yourself, we need to digress a little.

What is cryptocurrency exactly?

Back in 2008, a pseudonymous person called Satoshi Nakamoto (To date no one knows if this is a real person or a group of people), had an idea and published a white paper describing the details. From there, Bitcoin took off and today, it’s estimated that about 9,000 virtual currencies are in existence. Crypto is a form of currency using digital files as currency.

They say that no one person or a government can control it because it uses decentralized control, and is simply a ledger entry on the internet. The most popular of these currencies are Bitcoin, Ethereum, Dogecoin, and Litecoin, with Bitcoin leading the pack.

Tesla, owned by Elon Musk, bought $1.5 billion in it and said Tesla would accept it as payment for vehicle sales. To give you an idea of its volatility, in 2010, one coin was worth $0.08, and jumped to $56,000 in 2021. It’s had many ups and downs since 2010, and one can only speculate what direction lies ahead.

How does the IRS view cryptocurrency?

Cryptocurrency gives off the appearance as some form of money, but the IRS doesn’t see it that way. They say that it’s a financial asset similar to stocks or bonds, and when you sell it, there is a capital gain or loss. Prior to 2020, there were millions of sales generating substantial profits that went unreported and no taxes paid.

On May 20, 2021, The IRS issued a directive that any transaction of $10,000 or more must be reported to the IRS just like cash transactions. It’s also scrutinized by FinCen with this notice: Financial Crimes Enforcement Network (FinCEN) Guidance on the Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (FIN-2013-G001, March 18, 2013)

If you bought any of the cryptocurrencies in 2020 or prior, you’re probably wondering how to report it when filing your own income tax. To say that it’s confusing is a major understatement. This is relatively new, but as you learn more about reporting crypto, and if you’re doing your taxes by yourself, you should be able to file an accurate return.

Cryptocurrency must be reported on your tax return

Under IRS rules, you need to report transactions on your tax return any time you make or lose money on your investments. The IRS began a crack down on crypto transactions in 2019 when it sent letters to about 10,000 taxpayers who had cryptocurrency transactions, but none were reported and no taxes were paid.

You may have noticed a check box on your 2020 Form 1040, that said “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” You were required to check the “yes” box even if you just held some. It didn’t matter if you didn’t buy more or sold some in that tax year. I would expect that all the yes block returns will have some sort of flag for future filings.

How to report sales

Doing taxes by yourself at our site is fastPinWhen you file your taxes with the IRS for 2021, you must report all crypto sales on Schedule D of your Form 1040 in the appropriate short and long term sections. As with stocks or bonds, any sale held for one year or less is a short term capital gain or loss. Any sale held for one year or more is a long term gain or loss. Taxes on any gains would depend on the tax bracket you’re in.

Cryptocurrency is considered to be a financial asset by the IRS, and is treated like stocks or bonds when sold. Capital gains rates for 2021 are 0%, 15%, and 20%, unchanged from 2020. There were minor increases to the income limits. After offsetting gains with crypto losses, a $3,000 loss can be used and any excess carried over.

Anyone working as an employee, who gets paid in cryptocurrency instead of US dollars, must report those wages as ordinary income by converting the fair market value of the crypto as of the date received, to US dollars, using one of the listed exchanges. The gross amount would be subject to federal income taxes, FICA and Medicare taxes too.

If you work as an independent contractor, the same rules apply, plus you’re still liable for self employment taxes. If you are a miner of a cryptocurrency, and operate as a trade or business, you are also considered self employed and subject to those same taxes.

Another example of cryptocurrency being treated as an investment asset would be contributing some crypto to a bona fide charity. As long as you transferred the actual virtual currency and didn’t exchange it to US dollars first, you get the fair market value of the transaction as a charitable deduction.

The IRS published Notice 2014-21 which gives instructions on how to report them on your tax return. If you do your own income tax, it may be very helpful. They illustrate different scenarios and also a Q & A section for more detail.

Preparing your 2021 tax return

If you’re wondering how to file your taxes by yourself and be sure you’re reporting crypto transactions correctly, become familiar with notice 2014-21, and the IRS publications referred to. You are solely responsible for reporting crypto transactions, but you may be able to get some help from one of the exchanges that handle it.

If this is your first time reporting crypto, this article will guide you in the right direction when doing taxes by yourself. If you’re not confident enough yet, then it might be a good idea to meet with a competent tax professional.

Gust Lenglet

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