HONOLULU (KHON2) — Did you sell or trade crypto last year? Well, the IRS wants to know about it. Hawaii taxpayers can get their guidance from the IRS and apply them to Hawaii taxes.
“Being a pickup state we can easily do that for now unless the legislature tells us differently,” said Isaac Choy, director of the Department of Taxation.
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On your Form 1040, it will ask: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any virtual currency?”
The IRS treats virtual currency transactions taxable by law just like transactions in any other property, so if you sold, exchanged, mined digital assets or used it for purchases, you need to check yes. However, if you purchased virtual currency with real currency and had no other virtual currency transactions during the year — in other words, if you were just buying and “hodling” — then you can answer no.
The IRS has a list of Frequently Asked Questions on virtual currency transactions, including the following:
How do I determine if my gain or loss is a short-term or long-term capital gain or loss?
According to the IRS, if you held virtual currency for one year or less before selling or exchanging, then you will have a short-term capital gain or loss. If you held the virtual currency for more than a year, then you will have a long-term capital gain or loss. To calculate, your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency. You should report this on your federal income tax return in U.S. dollars. Click here for more information.
Do I have income if I provide someone with a service and that person pays me with virtual currency?
Yes. When you use virtual currency in exchange for performing services, whether or not you’re an employee, you recognize ordinary income. For more information on compensation for services, click here.
Calculating income: The amount of income you must recognize is the fair market value of the virtual currency, in U.S. dollars, when received, according to the IRS. You must report ordinary income from virtual currency on Form 1040, U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1, Additional Income and Adjustments to Income PDF, as applicable.
If I donate virtual currency to a charity, will I have to recognize income, gain, or loss?
If you donate virtual currency to a charitable organization described in Internal Revenue Code Section 170(c), you will not recognize income, gain, or loss from the donation. Click here for more information.
Will I have to recognize income, gain, or loss if I own multiple digital wallets, accounts, or addresses capable of holding virtual currency and transfer my virtual currency from one to another?
No. According to the IRS, if you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event, even if you receive an information return from an exchange or platform as a result of the transfer.
BITCOIN ON THE RISE
A recent study by Grayscale Investment, the largest digital currency asset manager, showed that more than one-quarter (26%) of surveyed investors already own Bitcoin, and investors are three times as likely to consider Bitcoin as a store-of-value investment, rather than as a currency.
According to the 2021 study, more than half (55%) of current investors in Bitcoin began investing over the year, showing that demand has risen tremendously. Approximately 66% of these investors were “hodling,” but of the ones who sold, 91% have sold at least some Bitcoin at a profit, the study said.
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The study also said even with the rise of market segments and use cases, such as decentralized finance (DeFi) and non-fungible tokens (NFTs), Bitcoin still accounts for 46% of the total value of crypto markets.