The IRS Gets Less Cryptic About Crypto
And Makes Claiming Ignorance Damn Near Impossible
If you've jumped on the cryptocurrency bandwagon — like 27 million Americans (about 8% of the population) — BEWARE.
Everyone’s favorite side of Uncle Sam, the IRS, isn’t messing around when it comes to crypto on your 2021 tax return. With the IRS's focus sharpening in recent years, it’s more likely than ever that filers could face scrutiny if they don’t properly report their crypto activity.
In years past, maybe it was easy to play — or truly be — ignorant. But not anymore.
The IRS Means Business
The IRS began asking about crypto in 2019, tucking the question away in a less noticeable spot on the tax form. In 2021, they moved it front and center — directly below your name and address on the first page of Form 1040.
So that “I didn’t know I had to claim crypto” excuse? It’s dead on arrival.
Your answer is now a simple yes or no: Did you receive, sell, send, or buy crypto? Be dishonest at your own risk. Even though the IRS audits fewer than 1% of tax returns annually, misreporting crypto can significantly raise your chances — and your penalties.
Cryptos Aren’t Actually Currencies
Despite the name, crypto isn’t treated like currency for tax purposes. Since 2014, the IRS has classified crypto as property, meaning all general property tax principles apply to crypto transactions.
That means every time you sell or exchange crypto, it's a taxable event. If your crypto increased in value while you held it in a taxable account, those gains are subject to capital gains tax — just like if you’d sold appreciated stock.
And the IRS is watching. The agency recently took legal action to obtain records from exchanges, winning access to customer info for anyone who traded over $20,000 in crypto between 2016 and 2020.
The Taxes Get Tricky
Most people buy crypto as an investment, not for spending. But when you do use it for transactions, the tax complications increase.
Why? Because using crypto to purchase goods or services still triggers a taxable event.
Example: Let’s say you buy an RV for $50,000 using crypto you initially purchased for $25,000. That $25k gain? Taxable. Just as if you’d bought the RV using appreciated shares of stock.
New Year, New Rules
Even the IRS doesn’t have all the answers. Crypto is still evolving — and so is the tax code. Every year, new rules are proposed, refined, or changed. In 2019, the IRS issued guidance for crypto “forks.” In 2020, FinCEN proposed rules requiring U.S. citizens to report offshore crypto holdings above $10,000.
While not all proposals have been adopted yet, the clear message is this: the IRS is watching, and it’s your job to stay compliant. Ignorance isn’t an excuse.
Need Help Keeping Up?
If all of this sounds like a lot to manage, you’re not alone. Cryptocurrency tax law is complex, fast-moving, and unforgiving. If you’re unsure how to stay compliant — or just want to make sure you're not missing deductions or making costly mistakes — schedule a no-obligation consultation with our advisors at NEST Financial.
We specialize in helping Austin families, entrepreneurs, and individuals navigate the modern financial landscape — and that includes crypto.
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DISCLAIMER: The information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For personalized guidance, reach out to info@nestfinancial.net.