By the time tax season rolls around, you want to make sure you’re fully up-to-date on how to report crypto. But that’s why we’re here.
Below, we’ve curated an extensive guide that walks you through how to report crypto on taxes. From the specific steps to some common reporting scenarios, we’re covering everything there is to know about cryptocurrency and your taxes. Let’s get started.
Key Takeaways:
- Cryptocurrency is Treated as Property: The IRS classifies crypto as property, and taxable events must be reported similarly to stocks or real estate.
- Determine Your Taxable Events: Selling, exchanging, or earning cryptocurrency are the primary activities that create tax obligations.
- Calculate Capital Gains and Losses: Subtract the cost basis from the fair market value at the time of sale to determine your capital gain or loss.
- Key Forms for Crypto Tax Reporting: Use Form 8949 for reporting sales/exchanges, Schedule D for capital gains and losses, and Form 1040 for income reporting.
- Selling Crypto Involves Capital Gains: When selling crypto for fiat, report gains or losses based on the difference between the purchase price and the sale value.
- Keep Detailed Transaction Records: Recording dates, amounts, and transaction types will simplify tax reporting and ensure accuracy.
What You Need to Know About Cryptocurrency and Taxes
Before we talk about reporting crypto on taxes, let’s talk about cryptocurrency and taxes as a whole.
The IRS treats cryptocurrency as property, meaning it is subject to the same tax rules that apply to other types of property, like stocks or real estate. Each time you sell, trade, or receive cryptocurrency as payment, a taxable event occurs, and you must report it on your tax return.
However, not every cryptocurrency transaction triggers a taxable event and understanding which transactions are taxable can help you stay compliant with IRS rules and avoid unnecessary penalties.
How to Report Crypto on Taxes: Step by Step
So, how do you report crypto on taxes when the season rolls around? Here are the three main steps you need to take when filing.
Step 1: Determining Your Cryptocurrency Taxable Events
The first step is identifying which of your cryptocurrency activities count as taxable events. Ask yourself the following questions to determine if you owe taxes on your crypto:
- Did you sell any cryptocurrency for fiat (USD or another traditional currency)?
- Did you trade one cryptocurrency for another, such as exchanging Bitcoin for Ethereum?
- Did you use cryptocurrency to purchase goods or services?
- Did you receive cryptocurrency as payment for work or services?
- Did you earn cryptocurrency through mining, staking, or rewards programs?
If you answered “yes” to any of these questions, those are taxable events that must be reported.
However, simply holding crypto or transferring it between personal wallets does not create a taxable event.
Step 2: Calculating Gains and Losses
Once you’ve identified your taxable events, the next step is calculating your capital gains or losses. Here’s how you can do that:
- Determine your cost basis: This is the price you originally paid for the cryptocurrency, plus any fees associated with acquiring it.
- Calculate the fair market value: This is the value of the cryptocurrency at the time of sale, trade, or payment.
- Calculate the difference: Subtract your cost basis from the fair market value to determine your capital gain or loss.
For example:
- If you bought Bitcoin for $5,000 and later sold it for $10,000, you have a $5,000 capital gain.
- If you sold that same Bitcoin for $4,000, you would have a $1,000 capital loss.
Make sure to separate short-term gains (assets held for less than a year) from long-term gains (assets held for over a year), as they are taxed differently.
Step 3: Forms Required for Reporting Crypto Taxes
Okay, now that you’ve calculated your gains and losses, it’s time to report them using the appropriate tax forms. The key forms for cryptocurrency transactions are:
- Form 8949: Sales and Dispositions of Capital Assets
This form is used to report all of your cryptocurrency sales and exchanges. You’ll need to list each transaction, including the date of acquisition, sale, cost basis, and gain or loss. - Schedule D: Capital Gains and Losses
After filling out Form 8949, you summarize your total capital gains and losses on Schedule D. This form helps calculate your overall tax liability for the year. - Form 1040: Income Reporting
If you’ve received cryptocurrency as payment or rewards (such as staking or mining), you must report it as ordinary income on your Form 1040. You’ll include the fair market value of the cryptocurrency at the time you received it.
By completing these forms accurately and keeping detailed records of your transactions, you’ll ensure you comply with IRS guidelines and avoid penalties. That’s really all it takes.
Common Scenarios for Reporting Cryptocurrency on Taxes
When it comes to reporting cryptocurrency on your taxes, different transactions and activities trigger various tax obligations. Whether you’re selling, trading, or earning crypto, knowing how to report these common scenarios is essential to staying compliant with IRS rules.
Selling Cryptocurrency
If you sell cryptocurrency for fiat currency (like USD), you need to report the sale and calculate your capital gains or losses. Here’s how it works:
- Determine your cost basis: This is the original purchase price of the cryptocurrency, including any fees or commissions.
- Calculate the fair market value: This is the value of the cryptocurrency at the time of sale.
- Calculate your gain or loss: Subtract your cost basis from the fair market value to determine your gain or loss. Gains are taxable, while losses may be used to offset other income or gains.
For example, if you purchased 1 Bitcoin for $10,000 and sold it later for $15,000, you would report a $5,000 capital gain. If you sold that Bitcoin for $8,000, you would report a $2,000 capital loss.
Exchaning One Cryptocurrency for Another
Another common scenario is trading one cryptocurrency for another. When you do this, such as exchanging Bitcoin for Ethereum, the IRS treats this as a taxable event.
Even though you didn’t convert your crypto to fiat, you’re still responsible for reporting any gains or losses. Here’s how:
- Determine the fair market value of the crypto you gave up: This is the value of the cryptocurrency at the time of the trade.
- Compare it to the cost basis: Subtract the original purchase price (cost basis) of the crypto you gave up from its fair market value at the time of the exchange.
- Report your gain or loss: Just like with selling crypto, any difference between the cost basis and fair market value is a taxable capital gain or loss.
For example, if you bought Bitcoin for $5,000 and traded it for Ethereum when the Bitcoin was worth $7,000, you’d report a $2,000 capital gain. The fair market value of the Ethereum you received becomes the cost basis for future transactions.
Earning Cryptocurrency
Finally, if you receive cryptocurrency as payment for services, mining, staking, or other rewards, it’s considered ordinary income and must be reported as such. Here’s what you need to do:
- Determine the fair market value: The value of the cryptocurrency at the time you received it is considered your income.
- Report it as ordinary income: Whether you’re earning crypto as payment for work or rewards, you need to include the fair market value on your Form 1040 as income.
For example, if you earned 0.5 Ethereum for freelance work when Ethereum’s market value was $2,000 per coin, you would report $1,000 in income. This applies to mining and staking rewards as well.
Best Practices for Keeping Accurate Records
Before you go and report crypto on taxes, let’s quickly go over some of the best practices for keeping accurate records — as this will help make reporting so much easier.
- Maintain detailed records for every transaction: For each cryptocurrency transaction, you should record the date, the type of transaction (e.g., sale, trade, payment), the amount of cryptocurrency involved, and the fair market value at the time of the transaction. Accurate record-keeping helps you easily calculate gains, losses, and income when it’s time to file taxes.
- Keep supporting documentation: It’s important to keep backup documentation for your transactions, such as exchange receipts, transaction confirmations, or wallet logs. These documents can provide additional proof of the transaction details if the IRS asks for verification.
- Track dates and amounts: Always record the date you acquired or disposed of cryptocurrency, the amount of crypto involved, and its value in USD at the time of the transaction. This ensures that you can accurately calculate gains or losses and report them correctly on your tax return.
By following these best practices, you’ll ensure that your crypto transactions are properly documented, reducing the risk of errors and helping you stay on top of your tax obligations.
Get the Best Crypto Tax Advice
Reporting cryptocurrency on your taxes may seem complex, but by following the right steps and staying organized, you can ensure compliance with IRS regulations and avoid costly mistakes. Whether you’re selling, trading, or earning crypto, understanding how to report your transactions and maintaining accurate records will simplify the process.
If you need personalized guidance or have specific questions about your crypto tax implications, reach out to our tax specialists for expert advice and tailored tax solutions that help you maximize your returns.