Crypto Taxes: Online Tax Software to Report Bitcoin, NFTs and Digital Currencies

Cryptocurrency is a subset of virtual currency, and all of the IRS rules for virtual currency apply equally to crypto. To the IRS, virtual currency is defined as money that is not stored in US dollars or official foreign currency yet functions as a digital representation of value and works as a medium of exchange.

The IRS additionally defines “convertible” virtual currency such as Bitcoin or Ethereum as any virtual currency that can act as a substitute for “real” or fiat currency.

The IRS definitely doesn’t want tax filers to miss the virtual currency question that was added to the main 1040 and 1040-SR tax return forms last year — it’s right there under your name and address:

“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

You do not need to check “Yes” if you only bought cryptocurrency with fiat currency – US dollars or official foreign currencies – in 2021. You do need to check “Yes” if you:

• Received cryptocurrency as payment for goods or services
• Received crypto for free that wasn’t a bona fide gift (e.g. airdrops)
• Received crypto by mining, staking or hard forks
• Exchanged crypto for property, goods or services
• Bought crypto by using cryptocurrency
• Sold cryptocurrency for US dollars or foreign currency

For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

In general, if you sold crypto, you’ll need to report like a stock sale, including the costs and dates when you purchased and sold it. If you earned cryptocurrency as income or from mining (as a hobby), that money goes on Schedule 1 (Additional Income and Adjustments to Income).

If you donated crypto or earned crypto as business income, there are different IRS forms and schedules you’ll need to complete. See the following table for a variety of crypto situations and the required IRS forms:

Crypto tax software helps you file your tax return with the IRS. Programs generally sync with crypto exchanges and wallets to track your purchases, sales and other transactions.

At tax time, most crypto tax software will export the various forms you need, saving you the time and trouble of tracking all your crypto transactions and completing IRS forms manually. Most crypto tax software charges money for their help with tax preparation. The amount is usually dependent on how many crypto transactions you make per tax year.