As the IRS begins to ramp up cryptocurrency tax audits and enforcement efforts in 2020, it’s becoming increasingly important to understand how to properly report your cryptocurrency trades and investments on your taxes. Here at CryptoTradersPro, we’re excited to be teaming up with the cryptocurrency tax team at CryptoTrader.Tax to help bring clarity to this topic.
In this guide, we walk through the step-by-step process for crypto tax reporting. You will learn exactly how to report your gains, losses, and income so that you can stay compliant this tax season.
Crypto Taxes Overview
Based on the 2014 IRS guidance on virtual currency, cryptocurrencies like bitcoin are treated as property for tax purposes—not as currency. This means that the same capital gains and losses tax reporting rules that apply to other forms of property like stocks, bonds, and gold also apply to cryptocurrency.
In short, all crypto sells, conversions, trades, payments, donations, and earned income are required to be reported by US taxpayers on their tax return.
Logan purchases 0.1 Bitcoin for $1000 in April of 2018 and sells it two months later for $2,000.
In this example, Logan has a $1,000 capital gain. He reports this gain on his tax return, and depending on what tax bracket Logan falls under, he pays a certain percentage of tax on the gain. Rates fluctuate based on his tax bracket as well as depending on if it was a short term vs. a long term gain.
On the other hand, if Logan had sold his Bitcoin for $800, he would have a $200 capital loss. This loss actually reduces Logan’s overall taxable income, and lowers the amount of taxes he pays for the year.
Now that we have a baseline understanding, let’s take a look at the step-by-step process for tax reporting.
Step 1: Understand how cryptocurrency is taxed in your country
This guide specifically addresses the cryptocurrency tax rules within the U.S. Very similar rules apply in most countries around the world, but make sure you check in with your governments tax reporting rules.
Step 2: Organize your data
After verifying your country’s tax treatment of crypto, you should sit down and organize all of your historical transaction data.
It’s important to maintain organized records of your cryptocurrency activity. Start out by pulling together records from each exchange that you traded on, your transaction history for each exchange, records of any income earned from mining/staking or being paid in crypto, gifts sent or received, and crypto received from air drops or fork events.
Take some time to account for all of this data before sitting down to do your crypto taxes. Thorough records will make your tax calculations much easier. If you haven’t been keeping detailed records, don’t worry. You can still use crypto tax software like CryptoTrader.Tax to pull together your transaction history with the click of a button.
Pro tip: The majority of cryptocurrency exchanges allow you to download your complete transaction history (buys, sells, trades). You can download this data in a CSV file so that it can easily be manipulated in a spreadsheet editor like Excel or Google Sheets.
Step 3: Calculate your gains and losses
Now that you have records for all of your transactions, you need to calculate the gain and loss from each transaction and report them on IRS Form 8949 (see picture below). You can do this by hand, or you can use crypto tax software to automatically complete this step. Remember, short term gains (crypto held for less than one year) and long term gains (crypto held for more than one year) should be reported separately.
To calculate the gains and losses for each of your transactions, apply the below formula:
Fair Market Value – Cost Basis = Capital Gain/Loss
Fair market value is simply how much an asset would sell for on the open market. In the world of cryptocurrency, this fair market value is how much the coin was worth in terms of US dollars at the time of the sale.
Cost Basis represents the original value of an asset for tax purposes. For your crypto trades, your cost basis will be how much it cost you in US dollars to acquire the coin.
So you simply subtract how much it cost you to acquire the coin from what you sold it for to arrive at your gain or loss on the transaction.
Crypto to crypto sales
It’s important to note that trading one crypto for another results in a capital gain or loss. These transactions need to be reported on Form 8949 just like selling crypto for USD.
The fair market value for a crypto to crypto trade is the USD value of the asset you are trading for.
For example, let’s say you bought 1 BTC for $1000 and later traded it for 20 ETH. To calculate your gain/loss on this trade, you need to lookup what the fair market value of 20 ETH were at the time of the trade. Let’s say 20 ETH were worth $1500. In that case, you’d recognize a $500 capital gain from the trade.
Crypto to crypto tax reporting can get tricky and tedious for those who have a high volume of transactions and trading on multiple exchanges. If you are in this position, automating all of these calculations with CryptoTrader.Tax can likely save you dozens of hours worth of manual work.
Step 4: Transfer net gain/loss to Schedule D
After each of your taxable transactions are reported on 8949, you should sum up each transaction in column (h) to get a total capital gain or loss number. Transfer this total number to Schedule D.
Step 5: Report any income earned in cryptocurrency
Crypto earned as income i.e. from a job, mining, staking, etc is income rather than capital gains. The amount of income reported should be based on the fair market value in US Dollars of the
cryptocurrency at the time you received it.
Step 6: Include your crypto tax forms with your tax return
Once you have completed all of the necessary forms for your cryptocurrency transactions, you
are ready to file your taxes. You can include these forms yourself if you do your own taxes, give them to your tax professional to file on your behalf, or plug them into your preferred tax filing software like TurboTax.
Crypto Tax Software – Automate the entire process
We are excited to be teaming up with the team at CryptoTrader.Tax to bring cryptocurrency tax automation to the CryptoTradersPro community.
CryptoTrader.Tax is the leading “do-it-yourself” software platform for cryptocurrency tax reporting. They automate the entire reporting process by integrating with all major cryptocurrency exchanges and platforms. This allows you to import your historical transactions with the click of a button. Once your historical data is in, the software will generate all of your necessary tax forms like Form 8949 based on this data.
CryptoTradersPro members are eligible to get 30% off all of their tax reports with the checkout code CRYPTOTRADERSPRO for a limited time.
Additionally, if you have any further questions about crypto taxes or your specific situation, the CryptoTrader.Tax team has staff at the ready to answer your questions. Just chat in to their live chat customer support reps or email them at [email protected] Let us know what you think on our Facebook page!