(CNBC) - After a record-breaking year for cryptocurrency in 2021, many investors may soon face a hefty tax bill for their good fortune.
The digital asset market value soared past $2 trillion, with bitcoin reaching an all-time high above $69,000 in November and ether surging to nearly $5,000 during the same period.
While prices dipped in December, many investors still saw sizable year-over-year growth.
“Be prepared to pay some tax,” said enrolled agent Adam Markowitz, vice president at Howard L Markowitz PA, CPA in Leesburg, Florida.
But calculating your balance can be tricky, he said, particularly if it was a year of heavy trading.
Cryptocurrency taxes
Since cryptocurrency is considered property, it may be subject to capital gains when exchanged or sold at a profit.
If you exchange digital coins, cash out to U.S. dollars or make a purchase, it may be a taxable event, said Matt Metras, an enrolled agent and cryptocurrency tax specialist at MDM Financial Services in Rochester, New York.
The gain or loss is the difference between your purchase price, known as the basis, and value upon sale or exchange, and tax rates depend on how long you have owned the coin.
You may qualify for long-term capital gains rates of 0%, 15% or 20%, depending on taxable income, if you hold the currency for more than one year.
However, selling or exchanging assets after less than one year triggers short-term capital gains, with regular income tax rates, up to 37% for top earners.
And many crypto investors trade digital coins frequently, according to a CNBC survey, with roughly one-third trading weekly or monthly, and nearly a quarter trading daily.
Marginal tax brackets for tax year 2021, single individuals
| Taxable income | Taxes owed |
|---|---|
| $0 to $9,950 | 10% of taxable income |
| $9,951 to $40,525 | $995 plus 12% of amount over $9,950 |
| $40,526 to $86,375 | $4,664 plus 22% of amount over $40,525 |
| $86,376 to $164,925 | $14,751 plus 24% of amount over $86,375 |
| $164,926 to $209,425 | $33,603 plus 32% of amount over $164,925 |
| $209,426 to $523,600 | $47,843 plus 35% of amount over $209,425 |
| $523,601 or more | $157,804.25 plus 37% of amount over $523,600 |
Source: IRS
Lack of reporting
One of the biggest crypto tax challenges is many investors don’t keep records of transactions, and it’s difficult for exchanges to track assets moving between wallets and brokers.
For example, if you bought bitcoin on Coinbase, transferred it to your wallet and then moved it to Gemini, the second exchange wouldn’t know the original purchase price, Metras said.
While the deadline for Form 1099-B, which brokers use to report an investor’s profits and losses, is Jan. 31, it’s unclear which crypto exchanges, if any, will send these forms for 2021.
Despite limited reporting, the IRS still expects you to report crypto transactions, Markowitz said.
How to calculate crypto taxes
If exchanges don’t provide Form 1099-B, you may be left with each broker’s spreadsheet of transactions or other reporting options, which may still be difficult to reconcile.
“The best thing to do is try to reverse-engineer it,” said Metras.
You can reconstruct records by importing each exchange’s files into crypto tax reporting software.
“It is overwhelming when it’s a big mess,” Metras said. “But everything adds up eventually.”
There are several companies that can provide Form 8949 to summarize crypto activity and file your returns, Markowitz said.
However, errors may be possible, and the reporting may not be sufficient for an IRS audit, he added.
By Kate Dore, CFP
JAN 5 2022
