2021 was a significant year for cryptocurrencies. Over the previous 12 months, more than half of active Bitcoin investors began investing. Throughout the year, the cryptocurrency market experienced all-time highs and lows, resulting in significant profits and losses for many investors.

Did you invest in cryptocurrency last year? If so, you should know that it is now taxable by the IRS.

For the majority of individuals, adding bitcoin to your tax return is rather straightforward. However, like with most things linked to digital money, the more involved you are, the more difficult things become.

Here’s everything you need to learn about which activities you may need to record to the IRS and how you can start preparing ahead.

When Should You Record Crypto Trades on Your Taxable Income?

Because cryptocurrencies are considered property by the IRS, their taxable value is determined by capital gains or losses. In other words, how much value have your assets acquired or lost at a particular time?

To determine if you owe taxes, consider how you used your cryptocurrency in 2021. Taxable events are transactions that result in a tax. Those that do not are referred to as non-taxable occurrences. Let us explore them:

2 Types of Taxable events:

Income taxable

Receiving an airdrop: A crypto firm may send you airdrops as part of the promotional strategy or incentive. Receiving an airdrop is considered income, and you must disclose the amount on your taxes.
Being paid in bitcoin: If you are receiving a paycheck from your employer through cryptocurrency, then you’ll likely be paying tax for this.

Making extra money: Certain cryptocurrencies may provide a return on investment. This is regarded as taxable income. Although this is typically called interest, the IRS considers it differently than bank interest.
Obtaining cryptocurrency in return for products or services: If you take cryptocurrency as payment for an item or service, you must declare it to the IRS as a profit.

Cryptocurrency mining: If you mine cryptocurrency, you’ll probably need to pay taxes based on your based on income on the market price of the coins when you got them. Treated as income under self-employment income is cryptocurrency mining revenue.

Obtaining more rewards: You could get free cryptocurrency in a number of different ways. These may consist of incentives such as receiving $3 in bitcoin for introducing a friend to a cryptocurrency exchange. In any case, you must declare this as income.

Capital Gains Taxable

Using cryptocurrency to buy products and services: For instance, if you use bitcoin to purchase a Thai meal, you’ll probably need to pay taxes on the purchase. The IRS doesn’t really distinguish between buying and selling cryptocurrency. Before an asset can be traded for an item or service, it must be sold, and when it is sold, cryptocurrency becomes taxable for capital gains.

Cashing out on cryptocurrency: For instance, if you use cryptocurrency to purchase ether, you technically need to sell some of your bitcoin first. The IRS views this as taxable since it is a sale. If you received more money for your bitcoin when you sold it, taxes will be due.

Trading cryptocurrency for money: Did you get cash for your cryptocurrency sale? If you trade goods for more than you paid for them, taxes will be due. You might be able to deduct a loss from your taxes if you sell something at a loss.

Non-Taxable

Giving a present: You are exempt from paying taxes on gifts of up to $15,000 per person per year. A present tax return must be filed if your donation exceeds $15,000 per recipient. Even if you didn’t plan it that way, transferring cryptocurrency to another person without first paying for any goods or services may be considered a gift.

Receiving a present: If you’re fortunate enough to get cryptocurrency as a gift, you probably won’t pay taxes on it until you sell it or engage in this other taxed activity, such as staking.

Purchasing bitcoin with money and retaining it: Cryptocurrency purchases and ownership alone are not taxed. When you sell something and the earnings are “realized,” the tax is frequently paid later.

Giving cryptocurrency to a recognized non-profit or charity that is tax-exempt: You can be eligible for a charitable deduction if you donate cryptocurrency directly to a 501(c)(3) nonprofit.

What do I owe in cryptocurrency taxes?

What now, since it appears that portion of your cryptocurrency activities is taxable? By analyzing your income, profits, and losses, you may get an idea of how much tax you will owe. That implies as follows:

How do I Calculate Capital Gains and Losses?

You must first know how much cryptocurrency you had before you started in order to determine how much you made or lost. This is referred to as the cost basis

When you trade your cryptocurrency, you may determine whether you made a profit or loss by deducting your cost basis from the sale price. A capital gain results if the proceeds are more than the cost basis. You will suffer a capital loss if you don’t.

Understanding Your Cost Basis
Your cost basis for purchasing cryptocurrencies is often established by the price you paid. The fair market value at the time you obtained the cryptocurrency, however, governs your cost basis whether you acquired it through mining or staking.

The basis the person who transferred the cryptocurrency to you possessed, as well as the fair market value at the time of receipt, will determine your cost basis for any gifts of cryptocurrency.

How do I calculate my crypto income?

If you pay taxes in the United States, you’re undoubtedly accustomed to seeing deductions for federal and state income taxes on your pay stubs. These income taxes, which frequently won’t be withheld or deducted, apply to the cryptocurrency you earn as income.

You’ll typically owe the amount of income tax that corresponds to your tax bracket when you declare your earnings. A word of warning: If you’ve made a lot of money from crypto activity, it may have an impact on your tax bracket and you may wind up paying a higher tax rate on part of your earnings.

Monitor Your Activities

As you begin trading in cryptocurrencies, one of the most crucial things to bear in mind is that it is your obligation to keep track of all your potentially taxable actions as well as the fair market value of your crypto during those activities.

Planning beforehand is the greatest thing you can do to make your 2021 tax filing for cryptocurrencies simpler. Even if that’s how you usually approach tax season, don’t wait until April 1, 2022, to start compiling your records and calculating what you owe.

BASC Expertise can help; we have knowledgeable financial experts that you can speak with for free to see which one is right for you. If you’re prepared to reach your financial objectives, start looking for a financial advisor right now.