While half of the world is still trying to understand what an NFT is, the total market value of cryptocurrencies rose to over $3 trillion in November 2021. Investors are exploring crypto and especially investments in the software and infrastructure that will support them. The U.S. government is behind in setting policy and regulation around this emerging tech and has yet to determine how crypto will be taxed a year from now. This presents both risks and opportunities for investors in 2021.


By now, you are probably accustomed to hearing the term “Bitcoin” regularly, and rightfully so, as it was the first virtual currency and continues to lead the pack with a market cap of over $1 trillion. However, Bitcoin is only one of the growing list of digital currencies now available. Ethereum, Solana, and Cardano are just a few of the top 10 altcoins (cryptocurrency alternatives to Bitcoin), all with their own impressive market shares.

The appeal of “changing the banking system” is a huge draw, and investors are excited at the prospect of capitalizing on the rapid expansion of this new world. Cryptocurrency is a decentralized digital currency with no single administrator or central bank. A concept that took a few years to pick up steam but is now truly changing the landscape and has become a viable investment option often included in the same conversation as more traditional opportunities like real estate and stocks. Performance-wise, the crypto, stock, and real estate markets are currently at an all-time high, giving investors more options to diversify their investments to meet their specific needs, desired returns, and tax concerns. While the early adopters may have been the young and tech-savvy, many in the financial sector are quickly realizing that virtual currencies are here to stay and can offer significant growth opportunities.

For those wary of the volatility or not yet comfortable purchasing crypto coins directly, another option is to invest in the tech that supports it. Blockchain technology (also referred to as DLT-distributed ledger technology) has many applications beyond the management of cryptocurrency transactions. Industries such as healthcare and global shipping can also make use of DLT, and many big players such as Intel and IBM are investing heavily in the different applications of the technology. For those looking to minimize their risk or not yet comfortable with the “newness” of crypto, investing in the tech companies who are exploring the broader applications for DLT may be a better fit. Or, rather than purchasing individual stocks, another option would be to choose index funds or ETFs (Exchange-traded Funds) that hold companies with a vested interest in blockchain technology and/or cryptocurrency.


While likely to change in the near future, the IRS currently considers cryptocurrency a capital asset, and it is taxed as property. The cost basis set at the time of purchase is used to determine capital gain or loss at the time of sale. The length of time held is also a contributing factor as short-term vs. long-term gains are taxed differently. As with all income-generating opportunities, good record keeping of cryptocurrency activity is crucial come tax season. A few key items to keep in mind throughout the year to be prepared for annual tax filing:

  • Every single transaction needs to be tracked
  • Be sure that your crypto exchange platform can provide the gain/loss reports required for tax filing (This is especially important when transferring coins from one platform to another!)
  • Consider a dedicated crypto tax app (e.g., Koinly, Accointing, CrytpoTrader) that can sync across exchanges to calculate capital gains & losses and provide the required tax reports
  • Any income derived from mining or staking* crypto coins must be tracked separately as it is treated as ordinary income from a tax perspective

*Mining and staking are methodologies by which new crypto coins enter into circulation. Mining refers to the process in which sophisticated hardware is used to solve an extremely complex computational math problem. The first to complete this successfully are awarded crypto coins (and/or transaction fees generated by the new block of coins created), and the process begins again. Staking is essentially purchasing and holding cryptocurrency for a specified period of time to support a blockchain network. The holder earns a percentage-rate reward in the form of more crypto coins at the end of the defined term in exchange for committing their coins to support the network for that timeframe. (Not all cryptocurrencies offer staking.)

Mining equipment used in the US can produce large first year losses due to section 179 or bonus depreciation. Another benefit of the current treatment of cryptocurrency as a capital asset instead of a security is that the wash-sale rule (designed to prevent investors from selling a security at a loss to claim the tax benefits, then repurchasing the same security within 30 days) does not apply. Congress is currently looking to close this loophole in the latest legislation. The specific identification method can be used to apply cost basis to sales based on your current year’s tax situation. This gives you the flexibility to use higher or lower cost basis coins depending on your annual tax bracket.

As noted earlier, however, Washington is still scrambling to catch up to the boom, and there is a current fight to force crypto exchanges to report more transaction information to the IRS, following similar rules in place for stockbrokers. Industry lobbyists and lawmakers who favor crypto say this would threaten technological innovation and the viability of a growing sector of the U.S. economy.


El Salvador recently announced that Bitcoin will be recognized as a national currency, and there will be no taxes on gains/income. Yes, you read that correctly. To encourage foreign investment, no gains on assets held in bitcoin will be taxed by El Salvador. Unfortunately, U.S. taxpayers are required to pay tax on their worldwide income. A foreign corporation setup probably wouldn’t work to defer taxes since crypto would typically generate Subpart F income.

If you have questions on your specific tax situation related to cryptocurrencies or are looking for more information before making an investment decision, contact us today!