Tax season is officially here, and with that comes the annual challenge of rounding up all of your tax documents needed for reporting. If you have invested or traded cryptocurrencies, there can be some added complexity, as your cryptocurrency exchange likely won’t be able to provide you with a capital gains and losses tax form.
Nonetheless, it is up to you to self-report these gains and losses on your tax return. This guide addresses five things that you need to be aware of when doing your crypto taxes.
1. Understand which trades are taxable
Just buying and holding cryptocurrency is not taxable. In the U.S., you are taxed on your income. Simply buying and holding does not generate any income.
Capital gains and losses tax rules apply only when you dispose of your cryptocurrency, whether that’s via selling it, trading it for another cryptocurrency, or using it to pay for goods and services. Whenever you dispose of your cryptocurrency, you incur a taxable event and either a capital gain or capital loss. You report these gains/losses on Form 8949.
For example, if you purchased 0.2 ETH for $50 in May of 2019 and then sold it two months later for $100, you would have a $50 capital gain. You report this gain on your tax return, and depending on what tax bracket you fall under, you pay a certain percentage of tax on the gain.
2. Learn how capital gains and losses are calculated
Remember, you are only taxed on your income incurred from capital gains—your losses will actually reduce your taxable income!
To calculate your gains and losses from your trades, simply subtract the cost basis of your crypto from the fair market value (or the proceeds) from when you disposed of it.
For example, if you purchased X amount of bitcoin for $1,000, and sold it for $1,200 a few days later, you would simply subtract your $1,000 cost basis from the $1,200 proceeds you received upon sale. This leads to your $200 capital gain that gets reported as investment income on your tax return.
3. Learn which tax forms you need to fill out
For each taxable event you incur, you need to record it on IRS Form 8949. This form details each of your cryptocurrency taxable events as well as your total gain or loss from your investments.
On Form 8949, list all cryptocurrency trades and sells along with the date you acquired the crypto, the date sold or traded, your proceeds (Fair Market Value), your cost basis, and your gain or loss. Once you have each trade listed, total them up at the bottom, and transfer this amount to your 1040 Schedule D. Include both of these forms with your yearly tax return.
Crypto tax calculators can automatically build these tax forms for you. Historical prices, dates, and fair market values for all of your trades and transactions will be retrieved automatically by the software.
4. Cryptocurrency exchanges can’t provide you with gains and losses reports
Due to the fundamental nature of cryptocurrencies (i.e. their transferability), cryptocurrency exchanges like Coinbase, Binance, Gemini, and others don’t actually have the ability to export capital gains and losses documents to their users. Depending on your trading volume, you may receive a 1099-K from your crypto exchange; however, these forms only report gross transaction volumes, which is useless when it comes to tax reporting.
Because cryptocurrency exchanges don’t have the ability to give gains and losses reports to users, you should use your transaction history from the exchange to calculate your gains and losses. It’s important to export transaction history from each exchange and platform that you use and keep records of your trading activity. This makes tax reporting much easier during tax season.
Tax season isn’t anyone’s favorite time of year. However, if you prepare properly, it doesn’t have to be stressful. The same principles apply to the world of cryptocurrency investments. Keep records and be sure to report your gains and losses with your taxes.