Chris Taylor

NEW YORK (Reuters), – Clients call Zach Gordon asking for advice on how to deal with cryptocurrency in their tax returns. There is a common thread.

“They have absolutely no idea,” says Gordon, a principal with Grassi Advisors & Accountants in Westchester, New York.

They are not the only ones responsible. It is not their fault. The entire field of cryptocurrency like bitcoin has been so new and rapidly growing that the Internal Revenue Service too is playing catch up about how to handle it in U.S tax returns.

However, as crypto adoption grows, the guidelines are becoming more clear. Pew Research Center found that 16 percent of U.S. adults have reported having used, or invested in, cryptocurrency.

“For years people almost thought of this as play money, and haven’t been so diligent about reporting it,” says Kelly Phillips Erb, a tax attorney and publisher of the site Taxgirl.com. “The IRS is super-serious about it now.”

Indeed, you might notice a mandatory little question on your 1040 tax form: “At any time during 2021 did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

You can think of cryptocurrency as stock. Capital gains tax is applicable to any profits made from a sale if the crypto has been held for a long time, which means more than a year. Your income level will determine whether you pay a 15%, 20% or 0% tax.

You are not taxable if crypto hasn’t been sold. Gains from the sale of crypto assets that are held for less than one year will be treated as ordinary income. The rate is determined according to your tax bracket.

You should get annual statements if your crypto trading has been done through large exchanges such as Robinhood (NASDAQ;) or Coinbase. This will simplify reporting. You can also be meticulous about keeping records on your own.

The problem is when more people receive crypto as a salary or as payment for services. In this case, it will be treated as normal income based on that day’s value.

Similar to the above, using crypto for payment of goods and services is considered a taxable transaction if its value has increased since your original acquisition.

TurboTax provides an interactive calculator which can help calculate how much you could owe on taxes.

Here are some things to remember as we approach the April 18 deadline for filing:

Do your Homework

Answers to commonly asked questions regarding crypto have been published by the IRS. They also provide a brief explanation and an overview of all IRS publications.

The exchanges often offer tax assistance to users through Robinhood or Coinbase.

GIFTING STRATEGIES

You can move cryptocurrency around the world without having to pay taxes by giving it away. You can donate up to $15,000 per year for an individual. Sites like GiveCrypto.org allow you to give directly to people in need. You also get tax deductibility for your charitable efforts.

This might work better than trying to sell it and then giving the cash away, since you’ve triggered an event tax that is taxable on you.

USE LOSSES

Crypto is an obviously volatile asset class. There might be losses as well, but not gains.

“If you have had gains from selling crypto, don’t forget you can offset your gains with losses, just like with stock,” says Lisa Greene-Lewis, a CPA and tax expert with TurboTax. “You can also offset ordinary income (like from wages) with up to $3,000 in losses, and carry forward any remaining losses.”

SPEAK FOR A RENTERMISSION

It is a complicated topic, particularly for crypto-related individuals. So since we are already running up against this year’s filing deadline, there is no shame in asking for the standard six-month extension. You don’t even have to give a reason why.

While this will not get you out of payment – if you have a rough idea of how much you owe, you can still send that in by April 18 – it will give you ample time to consult tax professionals, sort out your obligations and properly report all transactions. “It’s better to file a complete and accurate return on extension, than a rushed and flawed one just to get it in by the deadline,” says Erb. “I would highly encourage people to take advantage of that.”