Long gone are the days when crypto was considered a fringe interest. Today, crypto has become a legitimate investment asset that is steadily finding its way into more and more portfolios. There’s a good reason for that.
Because, even though highly volatile, crypto outperforms most other assets available. In short, it could be a worthwhile investment, though not for the faint of heart.
Adding to the popularity of crypto is the rise of free-trading apps such as Robinhood that has made investing in all types of assets, including crypto, much more accessible for the everyday person. Robinhood has quickly grown its userbase to over 13 million, and now the question is, what about taxes?
This article will give you insight into the world of crypto taxes and how you can make sure you are staying away from trouble with the IRS.
The easiest way to think about crypto from a tax perspective is to think of them like stocks. Like stocks, the IRS considers cryptocurrency to be a capital asset, and as such, it will tax you when you realize any capital gains that you may have on your crypto.
Much like stocks, there are many myths and potential mistakes surrounding taxation.
There are three main scenarios where you will be taxed on your crypto activity in Robinhood.
Bonus: Though this isn’t relevant to Robinhood, receiving an award, airdrop, interest, staking income, mining income, or other income in the form of a digital asset causes a taxable event. For example, if you received 1 BTC from mining, that is considered taxable income for you.
One of the main reasons why so many people have decided to use Robinhood, aside from the zero-fee trades, is that it gives you access to most investment assets. This ease of use has made it easy for many people to dip their toes into investing in crypto.
When you decide to invest in crypto on Robinhood, your crypto stays on the Robinhood platform. It doesn’t go to your crypto wallet, as it does on other exchange services. And this has both its pro’s and con’s which you need to consider.
One of the main things to keep in mind when using Robinhood to invest in crypto is that it is not like other cryptocurrency exchanges such as Coinbase or Gemini. Robinhood is not a crypto exchange at all. Here are some of the main differences between Robinhood and other “traditional” crypto exchanges.
Robinhood provides you with a 1099-B tax form just like every other broker. The 1099-B form is what you need to submit to the IRS so that they can keep track of your capital gains or losses for the year.
In 2021, Robinhood started making the forms available in mid-February so you can have enough time to calculate your crypto gains or losses into your 2020 tax return.
If you need any amendments made due to any transactional errors, you can submit a review request, and Robinhood will look into it to make sure you are reporting correctly.
In this scenario, you’ll have to keep track of each transaction and make an individual report for the net capital gain or loss that corresponds with it. If done manually, this can be time-consuming and lead to processing mistakes. The good news is that there’s crypto accounting software that you can use to make the process faster. Also, you can work with Founder’s CPA so we can give you help for every aspect of the crypto taxation process.
Even though it may seem mainstream nowadays, the reality is that crypto is still some time away from truly having widespread use. In tax terms, crypto taxation is still in its infancy. It was only back in 2014 when the first IRS guidelines were introduced. As such, it can become challenging to manage your crypto gains and losses since very few CPA firms have real expertise on the subject.
You should record every single cryptocurrency transaction you make throughout the year and share it with your CPA. How each transaction will be taxed can depend on several different variables. For this reason, it’s essential that your accounting service has all the records to make sure that your crypto taxes are filed correctly.
Founder’s CPA specializes in crypto tax filing. If you want to talk with one of our crypto-tax experts, set up a free consultation and make sure that there are no gaps in your crypto filing to the IRS.