The real winners of the Super Bowl this year weren’t the Rams, who played a great game to win the title. They were cryptocurrencies, which in a few years have gone from nerd obsession to powerhouse advertiser buying airtime on the most watched television event of the year.
But crypto going mainstream has left an increasing number of investors puzzled about their tax obligations. As this year's April 18 tax deadline approaches, they will need answers more urgently.
Ben Borodach is co-founder of April, a tax platform that enables American taxpayers to file their returns more easily and affordably.
Let’s start with the good news. Tax treatments have evolved from a one-size-fits-all approach to more nuanced guidelines for disposals, staking, hard-forks, payments and gifts, among other events relevant to crypto.
While this shift has been helpful, fundamental issues remain unsettled; crypto activities, including transfers to wallets and the exchange of one digital currency for another have required new thinking. Cost basis, fair market value and date of receival can be difficult, if not impossible, to document. Staking, which can involve thousands of continuous, crypto-based transactions at varying fair market values, presents its own challenges.
This article is part of CoinDesk’s Tax Week.
Meanwhile, here are five essential questions you’re likely to ask this tax season as you try to navigate the gray areas of crypto taxation. The information below is not personal tax advice. If you have questions specific to your circumstances, consult a tax adviser or the IRS website.
Do I have to pay taxes on my crypto even if I don't receive tax forms from my exchange?
Yes. According to the IRS, virtual currencies are treated as property. When you sell that property, you must report a gain or loss. If you sold the crypto on an exchange, over the counter (OTC) or traded it to a friend or family member, you must legally report this transaction. Both on-chain and off-chain transactions fall under this treatment, including crypto that is transferred through local wallets.
Read More: 4 Crypto Tax Myths You Need to Know
My exchange marked crypto I transferred to myself as taxable. What should I do?
Many crypto traders have multiple wallets and transfer crypto between accounts. Ultimately, transactions among wallets you own and control are not taxable. However, the existence of multiple wallets can create headaches in tax reporting because exchanges and wallets lack context and may treat a transaction as a taxable event. To avoid problems, keep diligent records as you go or white-label wallet addresses. Cointracker offers helpful tools for recording your crypto activities. Unfortunately, you will have to review transactions individually and mark them accordingly to ensure accuracy.
If I bought crypto with another crypto, is it a taxable event?
A common example is the purchase of a non-fungible token (NFT) where you needed an on-ramp to make the acquisition in ether. Such transactions can be tricky because you must report your taxes in U.S. dollars when both assets exchanged have a discrete unit of account. According to the IRS, you must determine fair market value in U.S. dollars when you made the transaction of both currencies and report the difference between your basis and the sale amount. If your exchange doesn't provide you with this documentation, or you made an OTC transaction, explorers and trackers such as CoinMarketCap or Messari can be good resources.
Is crypto that I received through staking or forking taxable?
Yes. The IRS guidelines are clear that if you receive crypto from a hard fork, you should treat it as ordinary income based on the fair market value of that crypto when it was received. As stated above, unclaimed rewards are a gray area where you may want to consult a tax pro. You should also treat claimed staked rewards as ordinary income. If you are staking outside an exchange that documents the fair market value at the time of custody, you may want to use third-party tooling to help your documentation.
Read More: The 7 Types of Crypto Tax Nightmares
Is crypto treated as capital gains or income tax?
It depends. According to the IRS, crypto that is disposed of is treated as a capital gain or loss, whereas crypto that is received through staking or forking is treated as ordinary income. There are some exceptions, including crypto that you receive as a bona fide gift and may be exempt. Tax platforms like April can provide the appropriate context and guarantee the accuracy of your filing. You should consult a tax pro if you have questions about your situation.
UPDATE (Feb. 25 21:27 UTC): Clarifies that income taxes are due this year on April 18. April 15, the usual tax deadline day, is Good Friday.