Crypto and Taxes: What You Really Need to Know

August 12, 2021

|In Osprey Insights

|By Osprey Team

Lavender Flower Field via David Bartus

The $1 Trillion Infrastructure Bill was passed in the Senate and will make its way to the House of Representatives without the tax amendment excluding crypto miners and software developers.

But most of us are not mining or developing software for crypto. We’re investors and traders.

So here’s a quick review of what we really need to know about crypto taxes in the United States—

The IRS

Let’s start with the Internal Revenue Service.

In 2014, the IRS issued Notice 2014-21 stating,

For federal tax purposes, virtual currency is treated as property. General tax

principles applicable to property transactions apply to transactions using virtual

currency.

The IRS asks taxpayers directly if it had crypto transactions during the tax year on its Form 1040.

Taxable Crypto Events

Crypto actions fall under two categories. Capital gains tax events & income tax events.

Crypto capital gains tax events include:

Selling cryptocurrency for fiat (U.S. dollar, Japanese yen, the Euro etc.)
Using cryptocurrency to purchase goods and services.
Trading one crypto asset for another, on an exchange or peer-to-peer.

Crypto income tax events include:

Receiving cryptocurrency from an airdrop
Crypto interest earned from DeFi lending
Crypto mining income from block rewards and transaction fees
Crypto earned from liquidity pools and staking
Receiving cryptocurrency as a means of payment for carrying out work, including bug bounties

Ask The Expert

We asked Ritholtz Wealth Management CFO, Bill Sweet, for his take on the infrastructure bill and what it means for individual investors. His response,

For retail investors/traders, the Senate version of the bill presents a net positive, but only because it shifts some of the tax reporting requirements from investors to custodians. For good faith taxpayers, receiving Form 1099 from their custodian will help investors accurately file their tax return.

That said, the Senate version of the bill is deeply flawed and presents a threat to the industry as a whole, specifically with respect to competitiveness here in the US.

The authors of the bill and the Senators themselves do not have the knowledge required to craft effective legislation without harming good faith innovators hard at work building the future of cryptocurrency and ultimately the next generation of US finance.

The bill must be amended to protect these actors to ensure that the US remains at the cutting edge of cryptocurrency development and the world leader in innovation as it has been since 1776.

One thing we’d like to note, Bitcoin didn’t drop on the news of the bill passing the Senate. You’d think if it was horrific to crypto we’d see more damage. That didn’t happen. Bitcoin trades at its highest price since mid-May. The price is resilient, but that’s a post for another day.

A Tool You Can Use

If you hate taxes like most of us, CoinTracker is a simple tool you can use that does a lot of the heavy lifting for you. It tracks your crypto investments and trades and calculates performance for tax purposes.

Check it out —