Yes Taxpayers Must Report Their Cryptocurrency Trading To The Irs Here’s How
Professionals have a major piece of advice for those who traded cryptocurrency for the first time last year: Take your tax prep seriously.
The IRS has been zooming in on cryptocurrency reporting with increasing interest in recent years. And the last thing you want is to lose money and time reconciling your tax liability, said Douglas Boneparth, a New York City-based certified financial planner.
So as tax season gets into full swing, here’s a quick guide to which cryptocurrency activity is reportable, how it’s generally taxed and the best ways to prepare.
Example : Capital Gain Or Loss
Tim found a deal on a living room set at an online vendor that accepts Bitcoin. Tim acquired $3,500 worth of Bitcoin to buy the furniture with. By the time he bought the furniture and converted his remaining Bitcoin back into dollars, the value of Tims Bitcoin had increased by $500. The gain realized by Tim was on account of capital, so Tim has to report a $500 capital gain on his income tax return. However, only 50% of that capital gain is taxable.
Provide The Details Of Your Crypto Gain/loss On Form 8949
After you determine whether your gain or loss is short-term or long-term, youll need to enter the details of the transaction in the appropriate section of Form 8949. Every transaction requires the same pieces of information, entered in either Part 1 or Part 2 , in the relevant column.
For most transactions, youll fill out:
The name or description of the asset you sold
When you acquired it
When you sold it
What price you sold it for
The assets cost or other basis
The gain or loss
Once youve detailed all your transactions on Form 8949, total your entries and then transfer the information to the corresponding sections of Schedule D. On Schedule D, youll subtract your cost basis from the total proceeds to arrive at your total capital gain or loss. From there, Schedule D will determine how much tax you owe or what kind of deduction you receive.
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Ordinary Income On Form 1040 Schedule 1
Although crypto profit is often reported as capital gains, there are instances where it is recognized as ordinary income. These include crypto mining and staking, hard forks and airdrops, and crypto lending interest.
Crypto income is reported on Form 1040 Schedule 1.
At the top of the form, it asks, At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? This was a slight tweak from the language on the 2020 Form 1040, which asked “”At any time during 2020, did you receive, sell, or otherwise acquire any financial interest in any virtual currency?” Many interpreted this question as indicating that even purchasing cryptocurrency with fiat had to be reported.
In addition to clarifying the language on the form, the IRS amended its crypto FAQ page to note that “if your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”
Total crypto income that youve received personally is included in the Form 1040 Schedule 1 Additional Income and Adjustments to Income on line 8 “Other income.”
Crypto tax software will calculate this total from your transaction history, so youll know exactly how much income you need to report on your Form 1040 Schedule 1.
Include The Totals From Irs Form 8949 On Schedule D
After step 2, you need to prepare your IRS Schedule D. This is an official IRS document that helps you calculate the amount of tax youre required to pay based upon your capital gains earnings or losses in the past year. On this form, you should carefully include the final totaled figures from Form 8949. Ensure you fill out all necessary sections of Schedule D with the relevant numbers that you calculated earlier.
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Alternatively You Can Use The Deemed Acquisition Cost
If you do not know what the virtual currencys actual purchase price or purchase date is, capital gain is calculated according to the deemed acquisition cost. As a result, the deemed acquisition cost is deducted from the virtual currencys selling price, instead of deducting the purchase price and selling expenses from it.
- If you owned the virtual currency you have sold for less than 10 years, the deemed acquisition cost is 20% of the selling price of the virtual currency.
- If you owned the virtual currency you have sold for at least 10 years, the deemed acquisition cost is 40% of the selling price of the virtual currency.
If you do not know what the exact purchase date is, report the virtual currencys acquisition year on your tax return, as it affects the amount of the deemed acquisition cost. Enter the first date of the year in the Acquisition date field in the calculation of capital gain tax, e.g. 1 January 2013, and leave all other fields blank.
Please note that if you apply the deemed acquisition cost to your calculation, you cannot deduct the purchase price of the virtual currency and selling expenses from the selling price.
The transaction, i.e. the trading of virtual currency for goods, triggers tax liability for the realised increase in the value of the virtual currency, and Sebastian makes a taxable capital gain of 1,000 500 = 500.
Sebastian reports the capital gain generated from the use of the virtual currency on his tax return as follows:
What Can Happen If I Do Not Report Crypto Gains On Form 8938
Although cryptocurrency is relatively new, the IRS has begun addressing it. While the IRS views crypto as property rather than cash, American expatriates still must report foreign-held or -acquired cryptocurrency over a certain amount. Like many other tax requirements, failure to report your crypto gains on Form 8938 can result in hefty fines from the IRS.
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Expenses Arising From Mining Are Deductible
Your expenses, if any, that support your mining activity can be deducted from your mining income. For this reason, expenses cannot be later deducted from any capital gain when you exchange or use a virtual currency.
For example, you can deduct costs arising from the increased use of electricity caused by mining from earned income . You can also deduct the acquisition cost of the equipment used in mining.
You can deduct the following percentages from the equipment acquisition cost:
- 25% when the equipment is used to obtain infrequent mining income
- 50% when the equipment is used to obtain mining income
- 100% when the equipment is used primarily to obtain mining income.
Please note that you need, upon request, to present proof of how often and for what purposes the equipment is used.
Kalle bought a computer at a purchase price of 1,800. He bought the computer for private use but also uses it for mining. Fifty percent of the purchase price, i.e. 900, is considered an expense deductible in tax assessment. Kalle can deduct the whole deductible acquisition cost of 900 on his tax return for the year in which the computer was bought.
When Do You Need To Report Your Crypto Taxes
The US financial year runs from the 1st of January to the 31st of December each year, so the current financial year is 2022. You need to report your crypto taxes for the financial year by the 15th of April the following year as part of your annual tax return, so the next tax deadline is the As this falls on a weekend – the official tax deadline for 2022 is Monday April 17, 2023. For US expats, this deadline is
If you filed for an extension to file your taxes using Free File or Form 4868, you’ll automatically have an extension until the 15th of October.
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Make A Purchase With Crypto
Making a purchase with your crypto is easier than ever. However, this convenience comes with a price you’ll pay sales tax and create a taxable capital gain or loss event at the time of the sale. Here’s how it would work if you bought a candy bar with your crypto:
- You transfer the crypto to the merchant through your wallet to theirs, including the sales tax.
- If your crypto’s value is higher than when you purchased it, you have created a taxable event with a realized capital gain. If it’s less, you have a capital loss. Each needs to be reported at tax time.
- Because it’s a taxable event, you need to log the amount you spent and its fair market value at the time of the transaction.
So, you’re getting taxed twice when you use your cryptocurrency if its value has increasedsales tax and capital gains tax.
First Fill In The Initial Information At The Top Of The Tax Form 8949 For The Short Term Trades Section You Will Need To Select Check Box A B Or C In Part I:
Short-term transactions reported on Form 1099-B showing basis was reported to the IRS
Short-term transactions reported on Form 1099-B showing basis wasnt reported to the IRS
Short-term transactions not reported to you on Form 1099-B
You will most likely select check box C, as exchanges typically do not provide crypto 1099s. However, if an exchange has provided you a 1099-B, you will want to check A or B.
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Do You Have To Pay Taxes If You Receive Staking Rewards But Dont Sell
Receiving crypto staking rewards is a taxable event subject to ordinary income taxes. You need to determine the Fair Market Value each time you receive staking rewards. All the batches need to be reported for the tax year.
Learn the tax implications of receiving staking rewards. If you use more complex earning vehicles like rebase protocols, check this tax guide to learn more.
If you receive crypto interest from other vehicles, you have to follow the same procedure: determine its FMV when you receive the interest and declare it as ordinary income.
The easiest way to track all the interest or staking batches you receive at different times is to use a crypto tax software like CoinTracking, which does it for you.
Keeping Books And Records
If you acquire or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services.
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you use cryptocurrency exchanges, we suggest that you export information from these exchanges periodically to avoid losing the information necessary to report your transactions. You are responsible for keeping all required records and supporting documents for at least six years from the end of the last tax year they relate to.
You should maintain the following records on your cryptocurrency transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party
- the exchange records
- the software costs related to managing your tax affairs.
If you are a miner, also keep the following records:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation
- the mining pool details and records
For more information, please review our link on keeping records.
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Us Accounting Method For Crypto Taxes
Now you know how crypto is taxed, you can calculate your crypto taxes… simple, right?
It actually gets a lot more complicated at this point. If you’ve got multiple crypto investments and transactions – it all starts to look like a bit of an uphill battle. First things first, you’ll need to figure out your cost basis.
We’ve talked about cost base a lot throughout this article and on the face of it, it sounds quite simple. However, what happens when you’ve got multiple assets and transactions in play.
Let’s use an example – you bought 1 BTC in 2019 for $4,000. In 2020, you bought another BTC for $20,000. In 2021, you sold 1 BTC for $30,000. If you use your first cost base, you’ve got a capital gain of a whopping $26,000. While if you use the second cost base, you have a very respectable capital gain of $10,000.
So how do you know which to use? Do you go through each transaction and identify each private key and cross-reference that with the transaction? You could, but even our example above is simplistic. Many crypto investors have hundreds of assets and thousands of trades throughout the year, making this a mountainous task.
This is where cost basis accounting methods come in. These methods dictate the way you calculate cost basis for a given financial year.
It’s good news for American crypto investors because the IRS allows multiple cost basis methods – and these can have a big impact on your crypto tax bill. The IRS allows:
Can You Write Off Crypto Losses
Crypto taxes can be a bummer, but at least you can deduct capital losses on Bitcoin or other digital assets, just as you would for losses on stocks or bonds. These losses can offset other capital gains on sales. When youre done tallying your winners and losers, you cant write off a loss of more than $3,000.
With drastic fluctuations in crypto prices happening all the time, many speculators will have losses. If you have losses on Bitcoin or any other cryptocurrency, make sure you declare them on your tax return and see if you can reduce your tax liability.
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What Happens If I Dont Report My Digital Currency Trades Or Sales
Failing to properly report your digital or cryptocurrency trades or sales on your tax return can lead to a number of issues with the IRS. To begin with, neglecting to mention the money made from these trades can affect the overall amount that you owe the IRS. If they notice that something seems amiss and choose to audit your return, they may find out that you did not include this information and hit you with fines, fees, or penalties on top of the amounts that you should have paid them had you submitted the information properly.
In order to prevent this from happening, you need to account for these transactions on your tax return. If you arent sure whether or not you made enough trades or received an amount of proceeds over the require threshold for the state in which you reside, you should see a tax professional. They can help you not only determine whether or not you need to report your digital currency information on your return, but also help you with your return in general to ensure that every section of is completed correctly.
Cryptocurrency Tax Reporting Clarified: What To Include On Your Tax Return
Confused about what cryptocurrency activity to include on your tax return? You’re not alone. In this post, we’ll demystify cryptocurrency tax reporting, including what crypto activity is taxableand what isn’tso you can properly record these when filing your taxes.
Cryptocurrency is evolving the world of finance, as evident in news headlines around the recent CoinBase IPO and large companies like Venmo and Mastercard announcing support of cryptocurrencies. But its not only the media thats taking notice. The growing use of digital currencies has also caught the attention of the IRS, who will be looking closely at tax returns for proper cryptocurrency tax reporting.
For many that own or interact with digital currencies, the IRSs guidance on cryptocurrency tax reporting has raised more questions than answers. While taxes are not necessarily anyones favorite topic, its important to understand when you need to report taxes on crypto in order to avoid a costly IRS audit.
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Crypto And Us Income Taxes: When And How Is Crypto Taxed As Income
From staking to sweepstakes, some of your crypto earnings, winnings, and more might be subject to U.S. federal income taxes.
In 2021, crypto reached the mainstream, which means theres a good chance youve made one or more crypto moves recently like spending, staking, lending, and more. But for the millions of Americans who entered the cryptoeconomy for the very first time last year, its crucial that you start thinking about one of the less-fun aspects of your journey: taxes.
First things first…
Coinbase doesnt provide tax advice. This article represents our stance on IRS guidance received to date, which may continue to evolve and change. None of this should be considered as advice or an individualized recommendation, but its important to us that our readers have relevant information available to them in the most accessible way possible. Please consult a tax professional regarding your own tax circumstances.
There’s a long list of crypto activities youll need to report to the IRS. In the U.S. the most common reason people need to report crypto on their taxes is that theyve sold some assets at a gain or loss so if you buy one bitcoin for $10,000 and sell it for $50,000, you face $40,000 of taxable capital gains.
However, the crypto universe is expanding fast theres just so much more to do than simply buying and selling, and crypto reporting can be tricky, as gains you receive from certain activities count as ordinary income.