Taxes: How to report crypto transactions to the IRS

EY Tax Partner and Principal Thomas Shea joins Yahoo Finance Live to explain what crypto investors should know before filing their 2021 taxes.

Video transcript

BRAD SMITH: Whether you're the dogefather, the self-proclaimed Satoshi, or flipped an NFT for profit in 2021, our next conversation explores how you can report crypto transactions accurately this tax season as part of our Taxes Made Simple series presented by Tax Act. And joining us today, we've got Tom Shea, who is the Ernst & Young partner.

Tom, great to have you here with us. Help us set this up going into this tax season. Perhaps, what's the top thing that people need to consider as they're getting ready to file and considering some of their gains or losses that they've made from crypto transactions?

THOMAS SHEA: Yeah, absolutely. And thank you for having me on. I guess, you know, I like to think about it in three steps. And if you can take this away from this talk, then mission accomplished. So the first is really understanding the universe of your transactions and what you've engaged in-- whether that's a simple buy and hold, whether you've exchanged and sold crypto for cash or other crypto, and even if you've engaged in some type of video game that involves in-game currency or NFTs-- really just kind of understanding that universe is a pivotal first step.

The second is really gathering all the available data. A lot of market participants out there are starting to issue certain forms that can assist taxpayers. And there are plenty of tools out there that can also assist with aggregating that data. But that is a pivotal second step.

And then the third step is really seeking the appropriate tax advisor. And this can be based on the complexity of your transactions, the volume of transactions. So those are really the first three steps-- and happy to elaborate more on either of those as you see fit.

AKIKO FUJITA: Well, Thomas, you highlight one of the key questions I think a lot of people have, which is, when do I have a taxable event? I mean, looking at the timing of all of this, how should they be thinking about that?

THOMAS SHEA: Yeah. So I guess the easiest place to start is, again, understanding what you've done. So if you've purchased cryptocurrency with cash, you do not have a taxable event. You do not have a reportable event on your individual tax return.

If you sold cryptocurrency for cash, you do have a taxable event. And you need to go back and assess what your gross proceeds were from that transaction and compare it to your cost basis, which is essentially what you paid for the asset. But also be mindful of other expenses that could be included in that cost basis, including exchange fees, gas fees, or the like.

If you've exchanged one cryptocurrency for another, you likely have a taxable event as well. And in terms of looking at your gross proceeds, you would need to assess what the fair market value was on that crypto on the date that you made that exchange.

BRAD SMITH: And so with all of that in mind, we've kind of walked through what people needed to know for the tax purposes for filing for the year 2021 and getting that filing in here during this year. But what might they need to consider for 2022, even if we think out even to the future?

THOMAS SHEA: Yeah. So right now, the guidance is relatively limited, right? We mentioned NFTs at the beginning. The IRS has not specifically addressed NFTs. There are a number of other, more complex types of transactions, such as lending, that have not had clarifying guidance.

I think in the more immediate term, the Build Back Better Act contains certain provisions that could significantly alter someone's trading strategy, specifically if they're doing high volume across multiple cryptocurrencies. So these provisions could both defer taxable losses and also accelerate taxable gains.

So that's something to be mindful of as the Build Back Better Act makes its way through Washington. I guess even further often-- a little bit further off into the future, you're going to have certain information reporting requirements. This should actually be beneficial to the everyday investor, because you're going to be receiving forms from the market participants, the exchanges that you're interfacing with, that are going to provide a little bit more information around your transactions-- so a little bit less self reporting.

The other thing to be mindful of as part of the Infrastructure Act is the requirement to file form 8300. Now, this is more if you have an active trader business, and it requires you to file an informational form when you receive cryptocurrency in excess of $10,000. So that's really just kind of scratching the surface here. There's plenty of other types of products and transactions out there that have yet to be kind of covered off by existing guidance.

AKIKO FUJITA: Yeah, certainly a lot of new threads to have to navigate. Thomas, it's good to have you guide us along here. Thomas Shea, EY Financial Services Crypto Tax Leader.