The end of the year has arrived with holidays, gift-giving and ringing in the New Year, but it also brings the beginning of the tax season as well. So, with one week left to take care of any stock sales or crypto position changes, French Larry Taylor reminds folks that they should probably be thinking about how their cryptocurrency activity is going to impact their income taxes for the new year’s income tax filing.
Volatility Increased Trading Activity
There’s no question that 2021 was a volatile year for cryptocurrency. French L. Taylor watched with everyone else as Bitcoin rocketed up to over $65,000 a coin, Etherium hit a high of almost $5,000 a coin, and plenty of other currency and tokens produce significant income for holders as well. There were also plenty of losses to be had, which can work against gains Taylor points out. While the heyday of early winter and spring produced great gains, the summer of 2021 was brutal as the digital market dipped. Again some returned in the fall, and folks still closed the end of 2021 higher than where things were at in pricing at the end of 2020. All of that means serious tax reporting, French Larry Taylor expects, from capital gains taxes to outright income earning as well.
Airdrops Get Taxed Harder Than Regular Trading
While French L. Taylor agrees it doesn’t apply to everyone, for a minority of fortunate holders some big airdrops were realized early in 2021. These surprise distributions from the administrators of a given cryptocurrency deposited sizable sums of digital coins into the wallets of those who already had similar tokens. Uniswap and Ampleforth were two of the big ones in 2021 (many folks didn’t realize they were included until well into 2021).
However, from the IRS’ perspective, the value of the coin when it was received is taxable income at the regular income tax rate (as opposed to capital gains). Regardless of what one does with the free digital coin afterwards, whatever it was worth at the time of receipt has to be added to one’s reporting income for the year. French L. Taylor points to a decision letter from the IRS in 2019 about airdrop taxability. Bonus free deposits count in this category as well, which is common for marketing of crypto-exchanges, programs and decentralized-finance teasers.
Most Trading Falls into Capital Gains
On the regular cryptocurrency trading side of things, much depends on whether a person’s crypto position has been held for a long time or was short-term (which is most people who jumped in this year). The calculation works very similarly to regular stocks that are either short or long. Short-term sales and related gains are taxed at the full capital gains rate. If, on the other hand, someone held the crypto for a year or longer, as in some fortunate cases with Bitcoin for example, and then sold it in 2021, it will be taxed at a lower, long-term capital gains rate, notes French L. Taylor.
International is Not an Excuse to Not File
French Larry Taylor also raises a flag for those who use international exchanges and hope to be off the hook from taxes because the digital coin they trade is outside the U.S. or a U.S. market player, think again. Not only does the taxpayer have to report the existence of the foreign account, all transactions with gains have to be reported as well for capital gains taxes due, regardless of being traded on an exchange in Shanghai or Singapore, for example.
Should folks get professional help? It’s not a bad idea for 2021, French L. Taylor agrees. This is one tax year where things will be complicated.