It depends on the type of cryptocurrency you are talking about. I've gathered some very useful (and somewhat voluminous) information that I hope will be helpful since I am not sure what type(s) you have and whether or not you are a broker or an individual. Both covered and non-covered are required to be reported, but the differentiation is more complex than a "they are or they are not". Yes, one of those tax "it depends" situations. My professional opinion on this is that the proverbial jury is still out on this one.
For tax-reporting purposes, the difference between covered and noncovered shares is this: For covered shares, we're required to report cost basis to both you and the IRS. For noncovered shares, the cost basis reporting is sent only to you. You are responsible for reporting the sale of noncovered shares.
Some more in-depth information for you:
Almost all cryptocurrency sales are taxable and would require you to check “yes” on crypto question on Schedule 1 .
For those of you who are still wondering why you have to answer the “crypto question” when you file for taxes, check out why the IRS included it here:
Forbes and Cryptocurrencies
The following transactions would fall under the “sell” category on crypto question. Some are obvious and some are not.
- Selling crypto assets in exchange for USD - Selling cryptocurrencies and receiving USD is probably the most common transaction an average US crypto holder goes through every year. Let’s take a look at an example and break down the tax consequences. Assume you purchased 1 BTC for $4,000 on March 1st, 2019. You sold this on an exchange for $9,000 on Oct 1st, 2019. This would generate a short-term capital gain of $5,000 ($9,000 - $4,000). This is short-term because the holding period (the duration you kept the asset) is less than 12 months. Short-term capital gains are taxed at ordinary income tax rates. Your specific tax rate is based on your filling status and overall income level, and ranges from 10% to 37%. In contrast, if you were to sell your 1 BTC on April 1st, 2020, that would generate a long-term capital gain of $5,000. Long-term capital gains are subject to preferential tax rates. This means that those gains are taxed at either 0%, 15% or maximum 20% rate. An easy way to save on taxes is to sell your cryptocurrency position after you hold it for more than 12 months. If you sell your crypto after holding it for more than 12 months, whether you make $2,000,000 or $20,000,000 in profits, maximum capital gain tax rate you would be subject to is 20%. In addition to capital gain taxes, at high income levels, you may also be subject to a 3.8% Net Investment Income Tax.
- Purchasing goods and services using cryptocurrencies - When you purchase goods & services using cryptocurrencies, you are effectively selling your cryptocurrency in exchange for the product or service you receive. For example, let’s assume you have 1 BTC purchased on March 1st, 2019 for $5,000. On November 1st, 2019 you want to buy some computer equipment listed on overstock.com using your bitcoin. The total cost of equipment is $6,000. By November 1st, your original BTC has appreciated to $6,000. When you use your BTC, which is worth $6,000 now, to purchase the equipment, that creates a taxable event. In other words, you are disposing an appreciated asset and gaining access to a new asset. In this case, $1,000 ($6,000 - $5,000) will be taxed as short-term capital gains.
- Margin liquidation - Margin trading is not a new phenomenon in the crypto world yet many users have a hard time understanding why they have to pay taxes when they fail to respond a margin call. In simple terms, margin loan is a loan provided by a crypto exchange/platform to invest in other cryptocurrencies. If your balance falls below the “Maintenance Margin Requirement (MMRand you fail to deposit more money to maintain your MMR, the exchange will start liquidating your assets to cover losses. This will follow the same tax principals applicable to sale of cryptocurrencies.
- Liquidation of collateral - Thanks to Decentralized Finance (DeFi) now you can borrow money by collateralizing cryptocurrencies.
These are some transactions which will fall under the “sell” category of the crypto question. If you are an investor, gains and losses arising from crypto trading activities are reported on IRS Form 8949 and IRS 1040 Schedule D.
(Examples from Forbes Jan, 2021)
