It’s tax season—so what do we do about all our crypto?
If you traded cryptocurrency in 2021, whether you caught those big runs or not, it’s tax season—the deadline for taxes in the United States is April 18. Cryptocurrency is treated as property in the eyes of the IRS, meaning that when you sell it, you must recognize capital gains or losses, just as you would if you sold stocks or other assets.
Simply buying crypto or transferring assets between exchanges is not taxable, but for people who caught those big 2021 crypto bull runs and sold to record large cryptocurrency gains, that could mean a significant tax bill. Losses, on the other hand, can offset capital gains and reduce that tax bill.
In 2020, the IRS added a question to Form 1040 asking taxpayers, “at any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” A similar question appears on the 2021 Form 1040.
According to TaxBit, an IRS-compliant software for reporting crypto taxes, if you answer yes to that question, the IRS will check to see if you submitted an IRS 8949 capital gain/loss report.
“If the taxpayer fails to report their cryptocurrency taxes then the IRS can now prove intentional disregard for knowingly failing to report cryptocurrency taxes,” TaxBit’s cryptocurrency tax guide states.
In January, TaxBit announced the launch of the TaxBit Network, which aims to reduce the costs of generating tax forms and make crypto tax filing easier. The TaxBit Network allows users of supported TaxBit Network companies to integrate data from over 500 cryptocurrency exchanges, DeFi, and NFT data, see line-by-line tax calculations, and download completed IRS Forms 8949 and income reports that the users can upload to their chosen tax filing software or give to their accountant.
The introduction of the TaxBit Network is to “eliminate this barrier to mainstream digital asset adoption” with free 2021 tax forms and year-round access to TaxBit software, according to the company’s January announcement.
TaxBit, which has headquarters in Salt Lake City and Seattle, has raised over $230 million from investors since its founding in 2018. In August, Bloomberg reported that TaxBit, Inc.’s valuation had increased to more than $1.3 billion after a Series B round from venture firms IVP and Insight Partners. Now the company has partnered with a number of leading platforms, which will offer one-click TaxBit signup within each person’s native platform.
TaxBit partners in this process include Uniswap, Coinbase, PayPal, SoFi, Binance.US, Gemini, and Utah’s own SafeMoon, among others. “As Safemoon pushes the boundaries of blockchain technology in the FinTech ecosystem, our partnership with TaxBit is vital to providing increasingly greater benefit to our users. We are extremely pleased to be a part of the TaxBit Network with other large players in the industry,” SafeMoon CEO John Karony said in a statement.
TaxBit claims that in past years, generating crypto tax forms cost people “hundreds to thousands of dollars.” They’re hoping to change that this year. “In years past, cryptocurrency taxes have been a costly and cumbersome process. FTX US is glad to play a part in changing this by providing free tax forms to our users through the TaxBit Network. Removing the cost associated with cryptocurrency tax is a big step in progressing the industry forward,” Brett Harrison, president of FTX US, said in a press release with TaxBit last month.
In a study published by the Pew Research Center in November, just 16 percent of people said they had ever invested in, traded, or used cryptocurrencies, despite 86 percent of people saying they had at least heard something about it. While that represents growth from a 2015 Pew Research study that found just 1 percent of adults had used Bitcoin, Nick Shalek, general partner at Ribbit Capital, said in a press release that for cryptocurrency to go mainstream, solving problems with tax compliance is an important step forward.
“Mainstream digital asset adoption is largely dependent on modern technology to solve regulatory mandates, such as tax and accounting compliance,” Shalek said. “Ribbit is excited to announce our investment in TaxBit. We believe that TaxBit’s technology—and powerful ecosystem innovations such as the TaxBit Network—present a unique opportunity to save customers time and money while building a next-generation system of record that can unlock further use cases for digital assets.”
Beyond the 2020 Form 1040 question asking taxpayers if they had bought, sold, or exchanged cryptocurrency, the federal government is looking to crack down on the tax gap, including in the crypto world. November’s federal infrastructure bill signed into law by President Joe Biden included a new law requiring cryptocurrency exchanges to issue a 1099-B, reporting cryptocurrency transactions to the IRS directly beginning in 2023, according to CNBC.
“With the recent passing of the cryptocurrency tax provision in the Infrastructure Bill, proactively providing our users with the tax reporting and forms they need is an important step in our commitment to safety and compliance,” Brian Shroder, CEO of Binance.US, said in a press release.
Reporting cryptocurrency gains was already required, but some gains went unreported with some crypto exchanges failing to issue Form 1099-Bs, TaxBit Global Head of Information Reporting Solutions Erin Fennimore wrote in a Dec. 2 blog post detailing what the infrastructure bill means for crypto, which could include several shifts from the way things were done.
“Exchanges who haven’t collected personal information, such as a Tax ID, or reported in the past will be required to develop thorough onboarding and information reporting procedures,” Fennimore wrote, adding that onboarding procedures for cryptocurrency exchanges may need to change as the definition of a “broker” changes. Brokers are required to collect a certified taxpayer identification number for Form 1099-B reporting, she wrote.
“The collection of this personal information may be a shift in the historical onboarding for some crypto platforms, but it’s necessary for annual information reporting,” she said.