If you own Ethereum or Bitcoin and are dealing with cryptocurrency on your tax returns for the first time, Darien Advisors is here to help. We have provided a glossary of key terms and concepts to assist you during this busy season.
Net returns: The total net return on any cryptocurrency sale, trade, or other transaction is the total amount received minus any incurred costs. These costs may include market fluctuations, fees for the original purchase and sale, and any taxes or other costs related to the cryptocurrency.
Ordinary income: Ordinary income is income that is taxed according to an individual's regular tax bracket. In the context of cryptocurrency, this includes any money earned in crypto from paychecks, staking, promotions, or short-term capital gains. It is important to note that you are responsible for reporting all cryptocurrency you receive or fiat currency you made as income on your tax forms, even if the amount is only $1.
Tax loss harvesting: Tax loss harvesting occurs when an individual sells their crypto when its value drops below the amount they paid for it. These losses can be used to offset any capital gains realized in the same year. If you have not realized capital gains from selling crypto, you can also offset ordinary income with $3,000 of ordinary income when you file your income taxes. It is important to note that losses must be used to offset capital gains first, and that long-term losses offset long-term gains and short-term losses offset short-term gains.
Hard fork: In the past, there have been several hard forks, such as the creation of Bitcoin Cash in 2017. During a hard fork, anyone who owned Bitcoin on the network at the time was able to receive an equal amount of the new cryptocurrency after a separate blockchain was created from the original. The IRS has clarified that any earnings received from a hard fork should be treated as income.
We will continue to update this glossary on a rolling basis as we move through the busy season. If there is a term you would like to see explained, please let us know.