Quick Guide To Filing Your 2021 Cryptocurrency & NFT Taxes

What Happened

In 2021, we saw a record-breaking amount of NFT transactions and several popular airdrops such as $ENS, $SOS, etc. The most popular NFT marketplace, OpenSea, saw trading volume exceeding 800% YoY. It wasn’t a normal year for regular cryptocurrencies either. Bitcoin reached its all-time-high value near $69,000 while pushing the overall market cap over $3 trillion. A handful of market downturns, especially during the Q4, also lead to tax loss harvesting opportunities and increased trading activity. 

All this activity (regardless of gains or losses) must be reported on your 2021 tax return which is due by April 18, 2022. Unfortunately, tax compliance in the cryptocurrency space isn’t as straightforward as it is in the stocks & securities space. This guide walks you through what tax form to expect form cryptocurrency exchanges, their meaning, best practices to follow and which IRS forms you should complete to report your cryptocurrency activity.  

Key Concepts

How are cryptocurrencies taxed?

Cryptocurrencies are taxed as property according to the IRS Notice 2014-21. This tax treatment leads to taxable events each time you cash out, spend or exchange one cryptocurrency with another. Earning interest, staking rewards, mining income and receiving airdrops are also taxable events.

Investors must pay capital gains taxes based on the difference between the sales price of a coin and the cost basis (how much you paid for it). Interest, staking, mining and airdrops are subject to ordinary income taxes. 

What tax reports to expect from exchanges in 2022?

You should expect to receive the following IRS tax reports from cryptocurrency exchanges and similar platforms before January 31, 2022. The information reported on these reports summarize your 2021 activity.

1099-B (Proceeds from Broker and Barter Exchange)

Some cryptocurrency exchanges will issue you a Form 1099-B summarizing your capital gains and losses for year 2021. This report will list the purchase date, sold date, purchase price, sales price and the resulting gain or loss for each coin. 

You might also see 1099-Bs where cost basis information (how much you paid for the coin) is missing. Here, you must rely on your records or use a cryptocurrency tax software tool to determine the cost basis. If you don’t find out the cost basis, you may needlessly pay more taxes than required. 

1099-K (Payment Card and Third-Party Network Transactions)

If you had more than 200 transactions and $20,000 in gross proceeds in 2021, you should receive a Form 1099-K from cryptocurrency exchanges (except the ones that have chosen not to issue this form). 

This form will report your activity by month. Note that the information reported in this form is not necessarily helpful when it comes to filing your taxes. This is because this form reports your cryptocurrency profits on a gross basis without taking cost basis into consideration.

For example, say you purchased 1 bitcoin (BTC) for $10,000 and sold it for $30,000 during 2021. Form 1099-K would report $30,000 as opposed to the actual taxable gain of $20,000 ($30,000 – $10,000). So, make sure to calculate your cost basis before entering these numbers directly to your tax return. 

1099-Misc (Miscellaneous Information)

If you earn any rewards for completing an activity on an exchange (ex: – watching an educational video), or receive an income stream similar to interest income (ex:- staking income), and the amount is more than $600 during 2021, some exchanges will issue you a Form 1099-MISC.

Transaction history report

Most cryptocurrency exchanges (especially the non-US based ones) will not issue you any formal IRS tax report. However, they may have a transactions history report available for you to download. This report will show your annual activity which can be used to figure out your capital gains and losses using any crypto tax software of your preference.

Note that if you used DeFi platforms or other platforms where you had to login using a web wallet like Metamask during 2021, you will most likely not get any transaction history report from the platform. Here, you have to analyze your activity in your Metamask account to come up with the accurate taxable amounts. 

Don’t blindly rely on exchange-issued tax reports

Note that the tax forms you download from an exchange may not be entirely complete and accurate if you use multiple exchanges & wallets, frequently transfers coins in and out of those platforms, use decentralized exchanges or self-custody assets. 

If this is the case, it is highly recommended to use a crypto tax software to reconcile your cryptocurrency activity across multiple exchanges & wallets and arrive at the correct capital gain (or loss) amount which you have to pay taxes on. (Why your cryptocurrency 1099-B may be inaccurate)

Now that you know which tax reports to expect from exchanges and what they mean, let’s see what IRS tax forms you need to file with your personal income tax return to comply with crypto taxes. 

Which IRS tax forms to file with your individual tax return?

Form 8949 & Schedule D

Form 8949 is used to report your cryptocurrency & NFT gains and losses. If you receive a complete and accurate 1099-B from an exchange you can enter those numbers on this document. If you traded NFTs, you would have to rely on your manual records or connect your Metamask wallet to a cryptocurrency tax software to get the numbers needed to fill out this form. 

Schedule D summarizes what you reported on Form 8949. This schedule will also show your stocks & security gains & losses.

Schedule 1 (Additional income & adjustment to income)

The amounts reported to you by an exchange on the Form 1099-MISC discussed above (staking income, interest income & rewards income) would go on line 8z of Schedule 1. Also, if you claimed any airdrops during 2021,  ex:- $ENS Airdrop), those amounts would also be reported here.

Form 1040 Question

Last but not least, make sure to answer the cryptocurrency question (“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”) on the front and center of the Form 1040. 

If you dealt with cryptocurrency during 2021, you will most likely to have to check “Yes” for this broad question. That said, you can safely check “No” if you only;

1) held coins in a wallet during 2021 (hodler)

2) transferred coins from one exchange/wallet you own to another exchange/wallet account you own during 2021.

3) purchased cryptocurrency using USD during 2021. 

Next Steps

·      Go to Tax centers of each exchange you use and compile tax forms and transaction history reports. Tax forms should be available by January 31, 2022.

·      Make sure that the reports are complete and accurate before using them to file your taxes.

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·      If they are inaccurate and/or incomplete, use a third-party crypto tax software to reconcile your entire crypto activity and compute the correct gain (or loss) to report on your tax return. 

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Further Reading

·      $ENS Airdrop Comes With A Tax Bill – What You Need To Know

·      How The Infrastructure Bill Is Brewing A Crypto Tax Compliance Nightmare

·      How To Avoid Common NFT Tax Pitfalls.

 [SE1]Even if you just purchase but don’t sell/trade?

 [SE2]Perhaps one sentence on the difference between the two types of taxes – or even rates?