If you own cryptocurrency (such as Bitcoin), stablecoins, or NFTs, then be aware that the IRS labels these digital assets as “virtual currency” and considers them to be taxable property (just like stocks or any other investments). However, how you received your virtual currency and what you did with it during the year will determine whether or not you owe any taxes on it. Here’s what you’ll need to know.
Answer the 1040 Crypto Tax Question
Near the top of IRS tax Form 1040, you’ll be asked the following question:
“At any time during 2022, did you: (a) receive crypto as a reward, award, or compensation; or (b) sell, exchange, gift, or otherwise dispose of a digital asset?”
In other words, did you receive your virtual currency as the result of a trade, reward, or payment? If yes, then you’ll owe taxes.
However, if you simply bought a virtual currency and did not sell, trade, or give it away, then you will not owe any taxes.
Virtual Currency Capital Gains and Losses
Anytime virtual currency was sold or traded for something else, it will result in either a capital gain or loss (i.e., you either made or lost money). Therefore, they will be subject to the same capital gains tax laws as stocks
Filers can report their capital gains and losses on Schedule D. You may also need to file Form 8949 to report any additional information about the transaction.
Virtual Currency Income
If you received your virtual currency as interest or a staking reward, then it should be reported as “Other Income” on Schedule 1. The financial institution that paid these digital assets may send you 1099-INT and 1099-MISC summarizing the compensation.
If you earned your virtual currency as a freelancer or independent contractor, then the IRS considers you to be self-employed. People who are self-employed need to report their income on Schedule C: Profit and Loss From Business. The business you worked for may send you a 1099-NEC summarizing these transactions.
If your self-employment income ends up being more than $400, then you’ll have to pay self-employment taxes. These will consist of Social Security and Medicare taxes (similar to what you’d pay working for an employer).
For more information, please consult the IRS webpage: Frequently Asked Questions on Virtual Currency Transactions.