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As a matter of fact, the IRS has a specific crypto question on your tax forms that you must answer. This is how the IRS Form 1040 question reads with regard to digital currency:
“At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
Whew! Let’s just say that covers pretty much everything you would do with cryptocurrency, except buying it.
Even though we know the IRS is serious about getting their share of your digital profits, there is still much confusion about what needs to be reported. As stated above - nearly everything, except those straight up purchases, should be reported on your tax return. Let’s explore some common examples that you might be familiar with.
“They told me as long as I don’t cash out - I can trade all the crypto I want and the IRS doesn’t care.”
The fact is that when trading, you are “selling” one asset and buying a different one. It’s similar to the buying/selling of stocks or mutual funds. The difference (in US dollars) between the price you paid for the asset, and the value on the date you sold it is considered taxable gain (or loss). If you owned the crypto for more than one year, it’s called long-term gain (or loss) and if you owned it for one year or less, it’s short-term. Those sales are taxed at different rates depending on your income and if it was short- or long-term.
“When I consulted for her business she gave me some crypto as a thank you gift. Why do I have to include that as business income?”
A gift isn’t always just a gift. Sometimes they do have strings attached - and this is one of those times! When you are in business and someone gives you something of value in exchange for any service or product you provide, it’s the same as getting paid “cash money”. You’ll need to figure out the value at the time you received the cryptocurrency and report it in your Gross Income for your business. And yes, it’s also subject to self-employment tax if you are a sole proprietor.
“I received some Bitcoin as a gift and sold it. Gifts aren’t taxed, right?”
Okay, maybe you really did receive that “coin” as simply a gift. You’re right, most gifts aren’t taxed to the recipient (different rules for the gifter). However, the fact that you sold it created a taxable event. And you guessed it - the IRS wants to know. Every time you sell a digital asset (Bitcoin, in this case) it has to be reported on your tax return. You’ll have a capital gain (or loss) for the difference in the cash value on the date you received it and the date you sold it.
“I paid for my groceries with Bitcoin. That’s not selling it - so why do I have to report that on my tax return?”
In addition to buying your milk, eggs, and cheese you also “disposed of” your Bitcoin. This is considered exchanging it for something else of value…sort of like barter (trading one type of property for another). If you didn’t trade your Bitcoin for those groceries, you would have paid with the usual currencies - like cash, debit, or credit. Essentially, you did “sell” it and what you received in return was not cash, but rather ingredients for some amazing homemade meals. And, the IRS wants to know all about it!
“Crypto is just something I play with on the weekends. It’s all just for fun. That doesn’t count, does it?”
Hobbies are absolutely fun! What’s not fun is how you have to report your crypto play time on your tax return. Depending on how much you truly love playing the “crypto game”, it could result in hundreds or even thousands of separate “sales”. And yes, the IRS needs the details of every single one of them. The good news is that you may not have to enter them into your tax return one-by-one. If your crypto brokerage service allows it, TurboTax can import your transactions.
Whether you’re dabbling in digital currency, receiving payments for products or services, or investing in your future, each situation is unique and the above taxing situations may differ from yours. For example, maybe you're into mining or received some airdrops. TurboTax has an amazing Cryptocurrency Info Center that will help you out.
Finally, inquiring digital-minded people may need to know even more! If that’s you, check out the helpful articles below.
Your Crypto Tax Guide
Crypto Tax Forms
How do I determine the deductible value of a charitable contribution made in cryptocurrency?