Key Tax Trends: Crypto Taxes for Tax Year 2021

Want to learn more about crypto, crypto taxes and what all this means for your income? You’ve come to the right place. The TurboTax Tax Trends Report covers this topic in detail, giving you insight into key trends and data that will help you understand the landscape and tax implications in the world of virtual currency.

But wait — what exactly is virtual currency?

As the Tax Trends Report explains, virtual currency is a “digital representation of value that functions as a medium of exchange, unit of account or store of value.” This digital asset utilizes cryptography to validate and secure each transaction, which is recorded and distributed on a ledger like a blockchain. You report a cryptocurrency transaction as a taxable event on Form 1040, Schedule D and Form 8949. 

You can view the full TurboTax Tax Trends Report today. However, if you want a quick overview of our cryptocurrency data and the latest trends in crypto tax, read on — we’ve got the highlights right here.

About Our Crypto Data

If you want to fully understand the value of our cryptocurrency tax trends, it’s important to double-check where and how we’re getting our data. 

We gathered information from 16 million tax returns, all completed through TurboTax, and anonymized the data to protect our users. We carefully took samples to ensure we got info that better reflected the general U.S. population, rather than just those who use our tax software and other TurboTax solutions. Then, our experts crunched the numbers and extracted insights into finance, tax and economic trends — including virtual currency and crypto taxes. 

Why do we do it? Simple: We’re trying to make tax data more accessible so that it can be applied toward tax education and decisions, making tax season more fun.

Top Trends in Crypto and Crypto Taxes

According to a Pew Research Center survey cited in our Tax Trends report, 16% of Americans say they’ve completed a cryptocurrency transaction. That includes:

• Investing in crypto.
• Trading crypto.
• Using crypto.

Interestingly, however, that’s not the same number of people who reported a crypto transaction on their tax return. As our research uncovered, only 2.9% of filers reported taxable cryptocurrency transactions in the tax year 2021. Why is there a gap? It could be due to many reasons, such as the absence of taxable events to report. Our experts will continue to monitor this gap and educate taxpayers about what types of crypto transactions are taxable — because cryptocurrency tax, capital gains tax and similar tax rate rules apply to virtual currency, which means every taxable event must be reported properly. 

Another interesting point illuminated by our research is that there’s a different percentage of cryptocurrency sales transactions depending on age group. Those between 25 and 34 are more likely to have crypto sales transactions than any other age group; in fact, 4.5% of single tax filers in this age group noted crypto on their tax return in the tax year 2021. 

It’s not just about age, though. There were also differences depending on filing status. Here’s a breakdown of the percentage of people who reported cryptocurrency transactions in 2021 based on age ranges and filing status:

Head of Household

• 18 to 25: 0.63%.
• 25 to 35: 1.11%.
• 35 to 45: 1.29%.
• 45 to 55: 1.12%.
• 55 to 65: 0.62%.
• 65+: 0.24%.

Married Filing Jointly

• 18 to 25: 4.72%.
• 25 to 35: 7.11%.
• 35 to 45: 6.08%.
• 45 to 55: 3.34%.
• 55 to 65: 1.45%.
• 65+: 0.57%.

Married Filing Separately

• 18 to 25: 2.18%.
• 25 to 35: 3.26%.
• 35 to 45: 2.75%.
• 45 to 55: 1.49%.
• 55 to 65: 0.66%.
• 65+: 0.42%.

Single

• 18 to 25: 2.60%.
• 25 to 35: 4.50%.
• 35 to 45: 3.37%.
• 45 to 55: 1.57%.
• 55 to 65: 0.72%.
• 65+: 0.29%.

This data highlights one more noteworthy point: Crypto rates increased across all age groups and filing statuses since 2020. Maybe that’s because people are starting to learn more about cryptocurrency — which means they’ll need to learn more about fair market value, digital asset management, capital gain vs. capital loss and other topics related to crypto taxes.

Crypto Tax Takeaways for Tax Year 2021

It’s up to individual taxpayers to do research and understand how crypto exchange impacts their taxes.

For example, previous IRS guidance — issued in 2014 — clarified that virtual currency is treated as property for federal income tax purposes. This means crypto is governed by the same tax principles that apply to “stuff” you own, such as cars or furniture. In 2019 and 2020, the IRS took additional steps to clarify these rules, covering topics such as cryptocurrency investments or gifts. In tax year 2021, the IRS also updated a question on tax Form 1040; filers are now required to answer whether they received, sold, exchanged or otherwise disposed of financial interest in virtual currency.

The update to the question gives an indication of who disposed of cryptocurrency and clarifies what virtual currency transactions should be reported.

The crypto asset question on your tax Form 1040 prompts you to think about which situations may apply to you.  Keep in mind:

1. If you purchased cryptocurrency as an investment and sold it, it’s subject to capital gain and capital loss rules, just like stock transactions. 
2. If you’re paid in cryptocurrency after providing goods or services, the fair market value of the crypto would be included on your 1099 if you are a contractor or on your W-2 if you are paid as an employee. If you’re paid in crypto, it’s part of your taxable income; you’ll have another taxable event when you sell it.

Key Trends

As more people enter the cryptocurrency landscape, it’s becoming increasingly common to hear terms like “capital gain” and “capital loss” outside of stock trading. If gains are abundant, you’ll need to focus on the capital gains tax. If the tides turn, however, you should learn about offsetting losses.

A crypto investor can use “tax loss harvesting” to help balance losses and gains. How does that work? Well, let’s say you have capital losses. You can offset all of the losses against your capital cryptocurrency gains. If your capital losses exceed your crypto gains, you can use up to $3,000 of that to offset ordinary income, including wages. You can take any remaining losses exceeding $3,000 — and carry them forward to the next tax year. 

Get Crypto Tax Help From TurboTax

Cryptocurrency may be the next big thing in digitization, economics and even personal finance. You may be just getting up to speed on how it is taxed with the information we provide in articles like this one and our Tax Trends Report — but don’t worry about knowing all of the tax rules. At tax time, TurboTax Premium will guide you through your cryptocurrency transactions, allow you to import up to 20,000 cryptocurrency transactions at once, and help you figure out your gains and losses. You can meet with a TurboTax Live Full Service Premium tax expert who specializes in crypto, who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right.

One response to “Key Tax Trends: Crypto Taxes for Tax Year 2021”

1. 

   Insightful. Thank you!

   Reply