How to Report Crypto Gains and Sales to the IRS This Tax Season

February 1, 2022

*It’s important to note as a disclaimer that this is not tax advice, but rather information on the variety of ways you may be liable for taxes on various crypto products. Be sure to talk to a CPA if you need professional guidance.

Gm. Whether you’re Team HODL or you’ve just made profits on ETH, it’s important to understand that you can be liable for taxes on a variety of crypto transactions. A reported 16% of Americans have traded cryptocurrencies, and as a fast-growing market, it’s important to be aware that there are tax requirements for gains made on cryptocurrency, just like traditional investments. 

When filing 2021 taxes, the IRS will ask you about cryptocurrency. This year, there’s even a question about it on Form 1040: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?" So it’s important to be prepared for tax time.

Most taxes on assets are based on appreciation (gain) over original cost (basis). That is to say, you will need to report the amount of profit you make over the initial cost you put in. If you sell an asset for more than you paid for it, it is classified as a capital gain. For example, if you were lucky enough to purchase ETH for $300 and you now sell it for profit, you’re liable for capital gains taxes on it.

There are two types of gains: realized and unrealized gains. When you are holding the asset, it is an unrealized gain and you do not owe taxes on it. However, when you sell an asset, it then becomes a realized gain and you may be liable for taxes on the sale.

There are two types of capital gains:

  • Assets held for less than a year earn short-term capital gains, and the tax rate can be up to 37%, depending on your income. 

  • Assets held longer than a year earn long-term capital gains. You will pay a lower rate of capital gains tax if you hold the assets for longer.

Cryptocurrency is considered property for federal income tax purposes, so it’s treated as a capital asset by the IRS. This is very similar to taxes paid from stock and share trading. You are required to report sales, conversions, payments, and income to the IRS, and each of these transactions have different tax implications. In addition you may also be required to pay state tax on top of the federal tax. It’s not just the sale of cryptocurrency that can be liable for taxes, there are a whole host of other transactions that you might be taxed on.

There are a number of nuances when it comes to paying taxes on cryptocurrency assets. For instance, if you sell shares for a gain, the platform you sold them through will provide you with a 1099 form. It’s important to be aware of your circumstances as this year you’ll be asked whether or not you have sold cryptocurrency, and you’ll want to be ready with any of the forms you’ll need. 

But don’t worry, there are new softwares being built in order to help you generate tax forms and understand how to pay taxes on cryptocurrencies. One example is TaxBit, which allows you to link your wallets, or wherever you hold crypto, and will automatically generate a tax bill for you. 

Regardless of what income you owe taxes on, you can pay them easily through Catch. Catch allows you to pay taxes to the IRS quarterly, and does it automatically and for free.