Cryptocurrency Taxes 2021

The cryptocurrency market is exploding. Even with many coins experiencing a significant dip in 2021, the general consensus amongst experts and enthusiasts is that the market will continue to grow. This is an inevitable change in how we look at money, and how we tax it. That’s right- crypto is going to be taxed! Here’s what you need to know about cryptocurrency taxes for the 2021 tax year and beyond.



Way back in 2014, the Internal Revenue Service (IRS) determined that it would classify Bitcoin and similar cryptocurrencies as “property” under the tax code. This allows the federal government to tax crypto for capital gains, just as it would treat stocks and bonds. After all, most crypto users consider themselves “crypto investors.”

Cryptocurrency taxes and capital gains

Crypto is taxed when it is sold for fiat currency (such as the USD and British Pound). When it is used to purchase any goods and services in place of a fiat currency, it is also taxed. The final capital gains tax is placed when a cryptocurrency is traded or swapped for another one. That is, if you trade a Bitcoin for an equal amount of Ethereum in price, then that trade would be taxed under capital gains.

The IRS sees capital gains in two separate ways: short-term and long-term. Both have an impact on how much you are taxed at the end of the year, so it is important to keep records! For help, consider setting up a free consultation with a Yoke Tax professional.

Short-term capital gains are simply any gains (or losses) made from an asset which is held for less than a year. These gains are taxed under the same income tax bracket which you fall into. The tax rate for the year 2021 can be found on page five of the IRS’s Revenue Procedure 2020-45. If your taxable income does not exceed $19,900 with a cryptocurrency, then your crypto will be taxed at 10%- just like any other income you earned.

Long-term capital gains are a bit different. They focus on gains or losses for assets held for a year or more. Depending on the individual’s income, the amount which you are taxed can be much lower. Because of this, it is important that you buy to hold long term!

Can you deduct or carry over your losses?

The short answer? Yes.

However, it should be noted that you have limits. If your capital losses are greater than your capital gains, you can claim those losses. A single individual can claim those losses and deduct them from their taxable income for up to $3,000. Individuals who are married filing separately have a $1,500 limit. All of this information is noted on your Schedule D (also known as Form 1040).

A carryover is a provision which allows you to move your tax losses onto future years. This is typically used by individuals and businesses to reduce any future tax payments, though it can get complicated. This is partly because cryptocurrencies are so new, but also because of significant modifications made by the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act. A tax professional would be able to better identify where you fall into these payments, as well as how to calculate an amount which would save you the most money.

How scams impact crypto taxes...

Whenever there is money to be made, it can be guaranteed that scammers will rush to make a quick buck. Unfortunately, cryptocurrency is not exempt from this reality. It has its own set of scams. Some common ones include:

• Fraudulent ICOs (Initial Code Offerings)
• Suspicious crypto exchanges
• Fake wallets
• Pyramid schemes

Because crypto is built on being decentralized and open-source, it is not difficult to find those who are willing to take advantage of that openness. The only way to avoid getting scammed is to trust reputable sources, educate yourself, and get a second opinion from a financial advisor.

What happens if you lose your investments through cryptocurrency theft? The IRS sees situations like these as “complete tax losses.” You can claim them on Form 8949 as zero proceeds transactions. For example, buying Bitcoin on a coin exchange for $10,000 would be taxed as if you bought stock on a stock exchange. If your coin exchange provider was hacked and you lost your Bitcoin, then you would be able to report a $10,000 loss to the IRS.

What about pyramid schemes and Ponzi scams? Crypto which is lost through these situations are treated as itemized deductions by the IRS. That is, the amount in which you invest in the scam can be deducted from your taxable income. This can be a little difficult to prove, however, so clear and thorough documentation is a must.

How to get ready for cryptocurrency taxes in 2021

You can learn more about cryptocurrency taxes in this article.

Tax season comes sooner than you think! Because of that, being prepared is important if you wish to keep your head above water in the eyes of the IRS. Not filing your taxes on time can lead to many serious consequences. Failing to file your taxes correctly can lead to even worse ones. To avoid these negatives, consider these three tips.

First, keep a detailed record of all your cryptocurrency activity. Record all your crypto purchases and sales. Airdrops, trades, and interest earned from loaning crypto must all be recorded as well. Some may think that they can get away from paying their crypto taxes, but the IRS is always one step ahead! The vast majority of crypto exchanges have built-in tax reporting features which generate reports automatically. These reports are sent to the IRS in order to check if your information is truthful.

Second, calculate any capital gains and losses which you have accrued from your cryptocurrency. This is best done with a Yoke Tax professional. They will be able to identify the tax maneuvers which save you the most money, as well as maximize your return. Sign up for a free consultation today.

Finally, look at how your fiat currency is being used. Your USD can have several deductions which you might not be aware of. The Child Tax Credit is a fairly well known deduction, but did you know that the average professional can also qualify for meal deductions on their taxes? For these reasons alone, it is worthwhile to keep records on how your money moves, even if that money is not crypto.