As of Jan. 1, 2018, all U.S. taxpayers must report the market value of their cryptocurrency holdings at the end of every tax year. They do so via their 1040 Schedule D forms to claim any capital gains or losses they may have incurred. Thankfully, there are plenty of tools to simplify the filing of crypto taxes.
The first step in filing your crypto taxes is to get organized. You’ll need to keep track of all the information related to your crypto-related activities. That can be difficult if you don’t have a sound filing system. Here are some tips for organizing your records:
- Consider keeping separate spreadsheets for each exchange you use. That will allow you to sort through everything quickly when tax time rolls around.
- Keep all receipts related to cryptocurrency purchases securely stored at home or on an encrypted external drive. Prioritize backing up this data too.
- If possible, store copies of any statements from exchanges or wallets securely.
Figure out your cost basis
Before you can figure out how much crypto tax you owe, you need to know your cost basis. The cost basis is the price at which you acquired your cryptocurrency. For example, if you bought BTC, its average cost basis would be the average price of one bitcoin in dollars at the time of purchase.
If someone gave you some ETH as a gift and that was all they paid for it when they received it, their cost basis remains 0 USD — but don’t forget about gift taxes!
Suppose neither of those scenarios applies to your situation but instead involves buying directly from someone else via an exchange. In that case, calculating one’s cost basis can get complicated quickly if multiple trades are involved. Each trade will result in a new exchange order book entry.
Luckily some websites allow users to import their transaction history from any significant crypto exchange and automatically calculate their total gains based on those transactions.
Categorize your transactions
When reporting your cryptocurrency transactions to the IRS, you’ll need to determine whether they were capital gains or losses. Capital gains are the difference between what you paid for an asset and its worth when you sold it. In contrast, a loss is incurred when you sell something for less than what you paid.
Capital gains tax rates are lower than ordinary income tax rates—currently 0%, 15%, 20%, 25%, 28%, 33%, 35%, and 37%. The difference between capital gains and losses is called “cost basis.”
Total up your gains and losses
Once you have determined your cost basis, you can add your gain or loss for each trade. If the value of a cryptocurrency increased from when it was purchased, that would be considered a capital gain. Conversely, if the value decreases, then that is a capital loss.
You should report the total gains and losses on your trades on Form 8949: Sales and Other Dispositions of Capital Assets (PDF). This form will also show what type of security you hold (e.g., stocks) and which one(s) qualify for long-term versus short-term tax treatment. Most crypto assets will fall under long-term capital gains rates.
Once this information has been entered into Form 8949 and Schedule D: Capital Gains and Losses (PDF), then you can include all of these figures in Form 1040 — U.S Individual Income Tax Return!
Separate non-taxable events from taxable ones
The first step in filing your crypto taxes is to separate non-taxable events from taxable ones. The IRS has a list of the following types of transactions that are not taxable:
- Gifts, donations, inheritance
- Transfers between exchanges
- Forked coins (e.g., Bitcoin Cash)
- Hard forks (e.g., Ethereum Classic)
- Airdrops and other free tokens
Report trades on Form 8949, then use Schedule D to report capital gains and losses on your 1040 tax return.
A spreadsheet is an excellent way to track your trades, but you can also use the IRS’ forms. For example, form 8949 is used to report sales and exchanges of cryptocurrency, while Schedule D is used to report capital gains and losses. Both are available on the IRS website.
If you’re a casual trader or have yet to be ready for tax software, this method may be best for you.
The best way to figure out how to report your crypto taxes is by starting early and getting organized. The goal is not just to do what you have to do, but also to enjoy the process and ensure you’re doing it right.
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