How To Report Cryptocurrency on Your 2021 Federal Returns

If you invested in cryptocurrency in 2020, you have an obligation to report any gain or loss from your investments on your 2021 federal returns. Cryptocurrency transactions have tax implications under the Internal Revenue Code, and the IRS has made clear that it will be targeting taxpayers who underreport and underpay their cryptocurrency-related tax liability in 2021. Here, Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, provides an overview of what U.S. taxpayers need to know about reporting cryptocurrency on their annual returns.

Cryptocurrency Transactions are Taxable Events

Transactions involving Bitcoin and other cryptocurrencies are taxable events. As the IRS explains, “The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.” Receiving cryptocurrency as employment compensation also triggers income tax liability.

Reporting Gain or Loss from Your Cryptocurrency Transaction History

Under the Internal Revenue Code, U.S. taxpayers are required to report gain and loss from cryptocurrency transactions on their federal returns. This means that cryptocurrency investors and companies that utilize cryptocurrency minimally need five pieces of information:

• The means of acquisition (i.e. purchase, exchange for goods or services, or compensation for employment)
• The date of acquisition
• The purchase price or fair market value (FMV) at the time of acquisition
• The date of sale or transfer
• The sale price or FMV at the time of sale or transfer

These five pieces of information will determine whether a cryptocurrency transaction is reportable in any given tax year, the amount of reportable gain or loss and whether any gain or loss is characterized as capital or ordinary. For capital gains and losses, the acquisition and disposition dates will also determine whether they must be reported as short-term or long-term gains or losses.

But, additional information may be necessary as well. For example, as the IRS explains in its Frequently Asked Questions on Virtual Currency Transactions, tax liability is calculated based on an “adjusted basis.” Your “cost basis” is the amount you spent to acquire cryptocurrency in any particular transaction, while your “adjusted basis” is, “your [cost] basis increased by certain expenditures and decreased by certain deductions or credits in U.S. dollars.”

What if I Don’t Have Records of My Cryptocurrency Transactions from 2020?

The easiest way to accurately report your cryptocurrency transactions on your 2021 tax returns is to review your transaction history. But, what if you did not keep records of all of your transactions? You should be able to review your account statements from your exchange or other service provider—and these should provide all of the information you need to accurately complete your returns. If they do not, you will need to do additional research. The IRS expects cryptocurrency investors to accurately report and pay what they owe, and it will be treating any incomplete or unsubstantiated information as a sign of potential tax fraud.

Request an Appointment with Boston Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group

If you have questions or concerns about reporting your (or your company’s) cryptocurrency transactions on your 2021 tax returns, Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, can help. Call 617-692-2989, email ket@thornlawgroup.com or contact us online to request a confidential consultation.