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Written by Beau Jordan on January 3, 2022
Category: ,
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BlockFi Taxes Explained 2022: How Are Investment Taxes Handled?

BlockFi is a cryptocurrency investing app created in 2017 that has increasingly grown in popularity over the last few years.

One of the largest drivers of the growth is BlockFi’s ability to pay interest on supported cryptocurrencies stored on the platform. 

While other crypto platforms offer interest in crypto, BlockFi claims that it is the most trusted financial service provider in crypto with institutional support from an impressive set of investors.

As cryptocurrency has grown in popularity, the IRS has warned traders of the tax implications of buying and selling cryptocurrency.

However, with constant iterations of tax law, it is difficult to fully understand all cryptocurrency tax implications. 

Similar to taxes on the traditional equity markets (stocks), capital gains (or capital losses) and interest earned on BlockFi will need to be reported on your 2021 tax return. 

IRS Expectations

On the 2021 tax return, the IRS will directly ask each investor whether or not they transacted in cryptocurrency during the relevant tax year. 

Please note that the IRS expects all investors to answer this question honestly and provide all required documentation in the tax return. If an investor decides not to answer this question honestly, they can be subject to legal ramifications. 

The IRS has declared that cryptocurrencies should generally be reported as property (similar to stock in a company or gold and silver) for tax purposes.  

Since cryptocurrency is taxable, BlockFi will enable the ability for all users to download required tax documents directly off of the platform.

It is anticipated that forms will start to be available as soon as January 31, 2022 for the 2021 tax season. However, some forms are going to be available later.

Please keep in mind that since BlockFi provides all investors their downloadable tax documents, do not expect to receive any paper copies of these tax documents.

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Taxes On Capital Gains

Simply put, selling a security (stock, cryptocurrency, etc.) for a profit will result in a capital gain. Selling a security for a loss will result in a capital loss. 

A key tax difference between capital gains and losses is that capital gains become tax liabilities while capital losses become tax advantages that reduce tax liabilities. 

Capital gains and losses only occur during the sale of an asset.

In other words, if the investor held Bitcoin for all of 2021 and didn’t sell any, there will be no tax liability.

However, anytime there is a sale of a security, there will be tax implications. Such tax implications occur the year the asset was sold. 

Capital Gains

If an investor purchased $100 of Bitcoin and sold it for $150 in 2021, the capital gains tax liability would be $50 for the year. 

Capital gains can be bucketed into either short-term or long-term gains that result in different tax implications.

Short-Term Capital Gains

Short-term capital gains are the profits from the sale of an asset held for 1 year or less.

These gains are taxed at the investor’s ordinary-income tax rate. This rate varies year to year but can be as high as 37% for those in the top tax bracket (this rate varies depending on income level). 

Long-Term Capital Gains

Long-term capital gains are the profits from the sale of an asset held for more than a year. 

The benefit is long-term capital gains are taxed at a lower rate than short-term gains. The tax rates are either 0%, 15%, or 20% depending on the investor’s annual income.  

Capital Losses

A tax advantage is created anytime a security (i.e. cryptocurrency) is sold for a loss.

If an investor purchased $100 of Bitcoin and sold it for $50 in 2021, the capital loss would be $50 for the year.

This amount will ultimately offset the investor’s tax liability (example given in the next section). 

Net Gains/Losses

Rather than assessing each individual sale, the IRS determines tax requirements based on the net of combined capital gains and losses.

If over the course of 2021 an investor gained $100 from the sale of one cryptocurrency and lost $20 from the sale of another cryptocurrency, the net tax implication will be a capital gains tax liability of $80. 

If an investor is at a net loss for all 2021 cryptocurrency sales on BlockFi, the investor can offset up to $3,000 of ordinary income.

Lastly, if the loss exceeds $3,000 these losses can roll forward into future tax years. 

Taxes On BlockFi Interest Earned

The monthly interest paid out to investors using BlockFi’s monthly interest-bearing accounts is taxable.

As a quick reminder, the interest earned monthly in a BlockFi account is paid out in cryptocurrency. As such, the investor will be taxed the fair market value of the crypto received. The tax rate will be the same as the investor’s income tax rate. 

The following example is used for demonstration purposes only and does not signal current interest rates provided on a BlockFi account. To see current rates, visit the official BlockFi rates page.

Example

Let's assume an investor has 1.0 BTC in a BlockFi interest-bearing account.

After an entire year, the account earns interest of 0.045 BTC.

The entire amount of interest (0.045 BTC) is then taxed at the investor’s income tax rate. 

If the investor decides to sell any crypto earned from the account interest, there could be an additional tax liability. However, this tax liability is not realized until the profitable sale of the asset.

Below is a continuation from the example above. 

Over the course of the year, the investor’s account made 0.045 BTC from BlockFi’s interest.

If that amount of BTC is sold within a year of holding the crypto and the price of BTC increases, the investor then pays an additional short-term capital gains tax. If the BTC is sold after a year, the investor pays long-term capital gains tax. 

One final piece to call out about the capital gains tax is that the cost basis of the crypto will be the fair market value when the investor received the interest payment. 

Tax Forms That BlockFi Will Provide

BlockFi typically releases tax documents around Mid-February.

Once these tax forms are available, BlockFi will notify investors via email. 

Investors can expect to receive up to two separate tax reports depending on their activity on BlockFi. 

Form 1099-Miscellaneous (also known as the 1099-MISC) will include the investor’s interest received from their crypto investments through the BlockFi platform.

For the 2020 tax year, only investors who had more than $600 in interest received a 1099-MISC form. 

Form 1099-B will include the investor’s trading activity during the year. In other words, this is the investor’s capital gains and losses for the given year. 

How to Download Your Tax Documents

To download required tax forms, follow the steps below:

  1. Sign into your BlockFi account on the web application
  2. At the navigation menu open the Profile options
  3. Select ‘Reports’
  4. From the ‘Reports’ screen, select the ‘Taxes’ section
  5. From the ‘Taxes’ section, select ‘2021’ as the tax year

At this point, you should be able to access your relevant tax documents for the 2021 tax year. 

Start Your Tax Return Today

If you are ready to start filing your taxes, you can file your federal return for free using E-File!

BlockFi taxes explained
Article written by Beau Jordan

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