When accountant Zach Gordon gets calls from clients about how to handle cryptocurrency on their taxes, there is a common theme.

"They have absolutely no idea," says Gordon, a principal with Grassi Advisors & Accountants in Westchester, New York.

It is not entirely their fault. The whole arena of cryptocurrencies like bitcoin is so novel and fast-growing that even the Internal Revenue Service itself has long been playing catch-up about how exactly to treat it on U.S. tax returns.

That being said, the guidance is becoming clearer, just as cryptocurrency adoption is growing. According to the Pew Research Center, 16% of U.S. adults now say they have invested in, traded or otherwise used cryptocurrencies.

"For years people almost thought of this as play money, and haven't been so diligent about reporting it," says Kelly Phillips Erb, a tax attorney and publisher of the site Taxgirl.com. "The IRS is super-serious about it now."

Indeed, you might notice a mandatory little question on your 1040 tax form: "At any time during 2021 did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?"

The basic framework is to think of crypto like a stock holding. If you have held it long term, meaning over a year, profits from any sale are subject to capital gains tax. That means a tax rate of 0%, 15% or 20%, depending on your income level.

If you have not sold crypto, there is no taxable event. But with short-term holdings of less than a year, gains from a sale are treated differently -- as ordinary income, with the rate determined according to your tax bracket.

If you have been buying and selling crypto through major exchanges, such as Coinbase or Robinhood, then you should be getting annual statements that will make reporting straightforward. Otherwise, be diligent about record-keeping on your own.

Where things can get trickier is that more people are receiving crypto as salary or payment for services, in which case it is treated as ordinary income, based on the value that particular day.

In a similar way, if you have used crypto to pay for goods or services, that is considered a taxable transaction, if the currency value has risen since you originally acquired it.

TurboTax has a helpful interactive calculator to figure out your potential tax hit.

A few issues to keep in mind, as we close in on the April 18 filing deadline:

DO YOUR HOMEWORK

The IRS has published answers to frequently asked questions about crypto and a basic explainer and a roundup of its publications on the subject.

Exchanges themselves often have helpful tax resources for users, such as Robinhood and Coinbase.

GIFTING STRATEGIES

One way to move crypto around without incurring taxes is to give it away. For an individual, you can give up to $15,000 a year. For charitable organizations, you can use sites like GiveCrypto.org to donate directly to those in need and get a tax deduction for your efforts.

That might be a better option than selling it yourself and subsequently giving away that cash, because then you have triggered a taxable event that falls on you.

USE LOSSES

Crypto is obviously a volatile asset class. Instead of gains, you might also have losses.

"If you have had gains from selling crypto, don't forget you can offset your gains with losses, just like with stock," says Lisa Greene-Lewis, a CPA and tax expert with TurboTax. "You can also offset ordinary income (like from wages) with up to $3,000 in losses, and carry forward any remaining losses."

ASK FOR AN EXTENSION

This is admittedly a tricky subject, especially for those whose crypto involvement is frequent. So since we are already running up against this year's filing deadline, there is no shame in asking for the standard six-month extension. You don't even have to give a reason why.

While this will not get you out of payment - if you have a rough idea of how much you owe, you can still send that in by April 18 - it will give you ample time to consult tax professionals, sort out your obligations and properly report all transactions. "It's better to file a complete and accurate return on extension, than a rushed and flawed one just to get it in by the deadline," says Erb. "I would highly encourage people to take advantage of that."

(Editing by Lauren Young and Cynthia Osterman; Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.)

© Copyright Thomson Reuters 2022. All rights reserved.

Bitcoin
A Bitcoin and Dollar note are seen in this illustration picture taken September 27, 2017. Photo: Reuters / Dado Ruvic