How To Report Cryptocurrency On Taxes? 5 Important steps
Since cryptocurrency is still relatively new, it isn’t always easy to find tax experts who know about it. To help investors like you, we broke tax reporting for cryptocurrency down into a 5-step process that is easy to follow. When you’re done reading, you’ll know How To Report Cryptocurrency On Taxes and how to list all of your crypto transactions on your tax return.
How are cryptocurrencies taxed?
As a capital asset, cryptocurrency is taxed. If you sell your cryptocurrency for more than what you paid, you will have to pay taxes on the difference. How much tax you pay on cryptocurrency depends on how long you’ve had it. If you’ve owned it for less than a year, you’ll have to pay short-term capital gains tax at the same rate as your regular income tax.
If you’ve held on to it for more than a year, you’ll have to pay long-term capital gains tax, which can be anywhere from 0% to 20% of your total taxable income. You can, of course, claim a capital loss on your taxes if you sell your crypto for less than you paid.
This can cancel out any other capital gains you might have, and it might even lower your tax bill overall. Now that we’ve discussed the basics of taxing cryptocurrency, let’s look at how to figure out if you need to pay taxes on your symmetric encryption holdings.
How To Report Cryptocurrency On Taxes
Putting your cryptocurrency gains and losses on your tax return is the same as putting your stock or other property gains and losses on your return. To file your cryptocurrency taxes, you need to do five things:
Compute your cryptocurrency profits and losses
You’ll have a capital gain or loss every time you sell your cryptocurrency. Among these disposal events, but not only, are:
- You can get cash by selling your cryptocurrency.
- Your cryptocurrency can be traded for another cryptocurrency.
- Your cryptocurrency can be traded for another cryptocurrency.
To determine if you made a profit or lost money on each transaction, you’ll need to keep track of how the price of each asset has changed since you first got it. Then, you should fill out Form 8949 to report your capital gains and losses from your cryptocurrency trades.
How to declare your capital gains/losses
Here’s how an investor might figure out and report a capital gain. Not all of these calculations are so easy, though. A cryptocurrency trader who buys and sells a lot might buy thousands of coins in a year, making it hard to figure out how much they first paid for them.
This can be done mechanically for you by tax software like CoinLedger. Connect your exchanges, import your past trades, and let the software figure out your gains and losses in seconds for all your transactions.
Fill out IRS Form 8949
Use IRS Form 8949 to report the sale or exchange of a capital asset. Stocks, bonds, and cryptocurrencies are all examples of capital assets. You’ll need to fill out Form 8949 to report your capital gains and losses, but you’ll also need the following message on each transaction:
- A summary of the property you sold
- the date you bought it
- the date you sold it or gave it away
- the money you made from the sale
- The cost you paid for the land when you bought it
- What you win or lose
Do I have to disclose my capital losses?
Remember, in this section, you must list any cryptocurrency capital losses you had during the tax year. After all, the IRS needs to know about every event that costs money.
Capital losses can also help you save money on your taxes. You can utilize your capital losses to cancel your capital gains and up to $3,000 of your income.
Include totals from Form 8949 on Schedule D
Once you’ve filled out Form 8949, add your total net gain or loss to Schedule D. You can report your total capital losses and gains from all sources on Schedule D. About your short-term and long-term gains from Form 8949 and your cryptocurrency activities, Schedule D also has lines for Schedule K-1s from businesses, estates, and trusts.
Include any crypto-based income
In certain situations, you can earn cryptocurrency by mining, staking, getting bonuses for referring people, or working. When you make crypto this way, you’re making money, so you’ll have to pay income tax.
What form do I fill out to report my cryptocurrency earnings?
Depending on your position, you may require to use a different form to report your crypto income.
- Schedule A: If you got crypto from airdrops, forks, or other crypto wages and hobby income, this is usually reported on Schedule A as extra income.
- Schedule B: You’ll most of the time report income from staking or interest from lending out your crypto on Schedule B.
- Schedule C: If you earned crypto as a business, like getting paid for a job or running a cryptocurrency mining operation, this is usually treated as self-employment income and is reported on Schedule C. In this case, you might be able to deduct costs like electricity that are related.
Finish your tax return
Now that you’ve filled out Form 8949 and added your crypto income, your tax return for all crypto-related transactions should be done with your tax return. You can send your tax return to the IRS once you’ve filled out all your forms.
