Back in 2010 when programmers and forum dwellers were playing around with Bitcoin and buying pizzas for 10,000 BTC, no one was really worried about how the government might tax crypto. But in 2021, when seven crypto billionaires made the Forbes list of richest Americans, IRS heads have fully turned. And although the regulations and specifics are still being formulated, it’s very clear that the government doesn’t plan to miss out on tax revenue—and that calls for a crypto tax guide.

In 2014, the IRS unofficially classified crypto as property and thus, taxable as property. The long and short of it is, yes, you have to pay taxes on your crypto. No, it’s not anonymous or untraceable. These days, crypto is legit. The “everyone who uses crypto is a criminal,” song has been sung into history and if you want to avoid the wrath of the US government, you’d better be ready to pay up. But don’t worry, crypto investing can still be more profitable than traditional investing, you just need to take note of US tax laws a little more closely than you would have ten years ago.

How crypto is taxed

Even the best crypto tax guide can only get you so far. As complicated and ever-evolving as the regulatory situation is for crypto investing, it’s important to DYOR and talk with a professional tax advisor who can help you with your specific state laws and financial situation. Just to get a basic understanding of the landscape, however, here are some current things to note for your crypto investing in 2021.

pile of fiat and crypto

Fiat on-off ramps get KYC

Centralized exchanges and other kinds of fiat on-off ramps are working to comply with government regulations. That includes gathering KYC-AML and sometimes, sending you tax documents like a 1099. Crypto may still be a fledgling industry, but it’s definitely under the watchful eye of the trust monopolies it threatens. If you thought no one was looking at your crypto paper trail, think again.

Report profits and losses

Whether you have mad gains or you lose your shirt, make sure to report both. Gains, of course, are important because Uncle Sam wants his piece. Losses are also important because they can be deducted to offset your gains. Capital gains tax for short-term and long-term gains apply so, if you’ve held your crypto asset for more than a year, you will have a capital gains rate of 0%, 15%, or 20%. For short-term capital gains, there are varying brackets and you’ll want to document your transactions and calculate your rate.

What events are taxable?

There are several kinds of transactions to keep in mind as taxable:

  • Cashing out crypto for fiat
  • Getting paid in crypto
  • Trading one crypto for another
  • Paying a person or business for goods or services

It’s also possible that there the IRS could tax crypto from mining, different kinds of crypto rewards, or dividends. This is still murky waters, however, so keep an eye out for new or changing regulations.

Even if an exchange doesn’t send you tax forms, it’s your job to keep track of your transactions and report them. It’s often possible to export your crypto investing history from any exchange that you use, even if they don’t report to the IRS, themselves. And make no mistake, if the government knows about your crypto investing, they’ll hit you up with a letter at the least, and maybe worse.

Hodl to avoid paying

If you’re a Bitcoin maximalist who’s hodling for the long-term, you can breathe easy for now. When you buy crypto but you don’t sell, trade, or spend it, the transaction is not complete so you won’t owe taxes yet. Keep in mind, though, that if and when you do use it, the taxman cometh. If you happen to have a low-income year, that might be a good, strategic time to change some crypto into fiat for minimal tax consequences.

Crypto IRA

Looking into a self-directed crypto IRA might also be worth your time if you want to find other ways to tax-shelter your crypto. The benefit of an IRA if you’re bullish on hodling is avoiding potential capital gains taxes. Just know that investing options and fees are different in a self-directed IRA. Not to mention, if your crypto investing can’t hang out until retirement, it won’t be much use to you in an IRA.

Crypto tax guide resources

Don’t forget that this crypto tax guide is not comprehensive or authoritative. From here on out, you’ll need to research how your specific situation should comply with US tax laws. Not without a few parting resources, however.

person doing taxes at table

Summary

Much as we all dream of the zero to billionaire crypto come-up stories, US tax laws are always there to provide the cold shower that we need. But don’t let the reality that “government’s gonna government”, slow you down or dissuade you from crypto investing. Yes, of course our faithful overlords will tax crypto. They’ll write new US tax laws. They’ll probably send you hunting for a crypto tax guide every year. But, hopefully, as time goes on, regulations will become more clear and crypto will become stronger in its role as the anti-fiat. Right now, during the growth pains and transition period, make a plan and DYOR. If you do, you can still get those gains!

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Michael Hearne

Michael Hearne is the CEO of Decentral Publishing and the host of the Uncensored Crypto docuseries.