_{Nick Vega is a money reporter at CNBC Make It. He previously covered the tech industry at the New York Post and Business Insider. Nick has a bachelor’s degree from Binghamton University and grew up in New York, N.Y. You can follow him on Twitter at @atNickVega.}

After a relatively quiet few years following a short-lived surge in 2017, bitcoin rose again in late 2020, finishing the year with a single coin worth just shy of $30,000.

The blistering rally prompted many investors to invest in the cryptocurrency for the first time, while others who had been holding onto their bitcoin for some time took advantage of the token’s exploding price to sell some of their holdings for a profit.

But with Tax Day looming, some users will come face-to-face with the fact that they now owe taxes on those gains. Depending on when you bought and sold your bitcoin — as well as other factors, such as your income — you could be on the hook to pay.

Here’s what you need to know about reporting crypto profits on your 2020 tax return.

The IRS classifies virtual currencies as property. What does that mean?

Under U.S. tax law, bitcoin and other cryptocurrencies are classified as property and subject to capital gains taxes. But you only owe taxes when those gains are realized.

Just because your Coinbase portfolio drastically grew in value last year doesn’t mean that you’ll be writing out a check to Uncle Sam come April. Similar to trading stocks, you only need to list gains you earn from bitcoin as income when you decide to sell.

“If you never sell your bitcoin, you never owe cash,” Ben Weiss, COO of CoinFlip, the largest Bitcoin ATM provider in the country, tells CNBC Make It. “Bitcoin is treated like if you bought and sold a stock.”

I sold my bitcoin in 2020. How much do I owe?

It depends on how long you held the bitcoin and whether you sold it for a profit or a loss. If you owned your bitcoin for more than a year, you will pay a long-term capital gains tax rate on your profit, which is determined by your income. For single filers, the capital gains tax rate is 0% if you earn up to $40,000 per year, 15% if you earn up to $441,450 and 20% if you make more than that. This IRS worksheet can help you do the math.

If you owned your crypto for less than 12 months, the taxes you pay will be the same as your normal income tax rate.

If you sold your crypto for a loss, there’s some good news. “What people don’t always remember is that if you sell it, and you lost money, that’s a write-off of the amount you lost,” Weiss says. “It’s important that people look for not just where they made money, but also where they lost money.”

You can use your losses to lower your taxable income by a maximum of $3,000 ($1,500 for married filing separately) and can carry over any additional losses to future years.

If I only sold a little bit of bitcoin, do I still need to report it?

Yes. A profit of any amount needs to be reported to the IRS. For the first time, this tax season’s 1040 form includes a question about virtual currencies on the front page asking taxpayers if “at any time during 2020, did [they] receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

“The IRS thinks there’s massive, massive underreporting in this area,” Ryan Losi, a certified public accountant (CPA) with Piascik tells Make It. “And they’re going to start targeting it.”

Indeed, the cryptocurrency question is the first item on the 1040 form, just below the individual’s contact information.

In the past, taxpayers may have been able to feign ignorance about their obligation to report crypto gains, but that won’t fly anymore. “Everyone who signs the tax return is signing that under penalty of perjury from the U.S. government,” Losi says.

Read more https://www.cnbc.com/2021/02/19/do-you-owe-taxes-on-bitcoin.html