Bitcoin, Ethereum, and Dogecoin…. Oh My!
Every day new reports come out about the pros and cons of cryptocurrency. The accessibility to purchase virtual currency is now easier than ever with apps such as Robinhood. While we will not discuss whether one should “invest” in the latest coin being mined, there are tax consequences to be aware of if you do. The IRS treats the sale of virtual currency like it does property. Any profit is subject to taxes – but only when you sell.
If you owned your crypto for less than 12 months, the taxes you owe will be at your normal income tax rate. If you owned it for more than a year, you will pay long-term capital gains (currently, the rates are zero, 10%, or 15%, depending upon your income). If you lost money selling crypto, you can write off $3,000 per year, and carry forward any losses over $3,000.
If you used virtual currency to buy something, you would report any gain or loss the same as if you sold the currency.
Whether you sell or not, the IRS is interested in knowing if you own any crypto coins – the first question on form 1040 is the question: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Form 8949 is used to report cryptocurrency gains and losses.