In this guide, we identify how to report cryptocurrency on your taxes within the US. For a complete overview of how the IRS treats cryptocurrencies like bitcoin, please review our official cryptocurrency tax guide.
Cryptocurrency tax reporting can seem daunting at first. However, it’s comforting to know that filing your cryptocurrency gains and losses works the same way as filing the gains and losses from investing in stocks or other forms of property.
There are 5 steps you should follow to effectively file your cryptocurrency taxes:
We walk through each of these steps in detail below.
For each taxable event (selling, trading, or disposing of your crypto), you need to calculate your gain or loss incurred from the transaction. If you’re unsure which of your crypto transactions qualify as taxable, checkout our crypto tax guide.
Your capital gains and losses each get reported one-by-one onto Form 8949.
Mitchell purchased 1 bitcoin for $10,000 on July 1. Two months later, he traded 0.5 of this bitcoin for 15 ETH. The fair market value of 15 ETH at the time of this trade was $6,000.
Trading bitcoin for ETH is a taxable event, so Mitchell needs to calculate and report his gain/loss from this transaction.
Mitchell’s cost basis in his 0.5 BTC is $5,000. The fair market value for the 15 ETH is $6,000. Using the below equation, we can calculate Mitchell’s capital gain from this transaction to be $1,000
Fair Market Value - Cost Basis = Gain/Loss
We report this $1,000 gain on Mitchell's 8949.
You need to calculate each capital gain and loss for all of your cryptocurrency transactions and report them on 8949.
Cryptocurrency tax software like CryptoTrader.Tax can handle this for you automatically. Simply connect your exchanges, import your historical transactions, and let the software crunch your gains and losses for all of your transactions in seconds.
Once you have calculated the gain and loss from each of your cryptocurrency taxable events, you can use this information to fill out your Form 8949.
IRS Form 8949 is used for reporting the sales and disposals of capital assets. Some examples of capital assets include stocks, bonds, and yes, cryptocurrencies.
For each taxable transaction, complete the following on 8949:
The below video gives a demonstration behind the process of filling out Form 8949 for cryptocurrency transactions.
Instead of filling out this form by hand, you can use software like CryptoTrader.Tax to auto-fill your 8949 for you based on your historical transaction data. You can learn how the crypto tax software works here.
Once your 8949 is filled out, take your total net gain or net loss from 8949 and include it on Schedule D.
Schedule D reports your overall capital gains and losses from all sources. In addition to your short term and long term gains that come from 8949 and your crypto activity, other line items reported on Schedule D include Schedule K-1s via businesses, estates, and trusts.
In certain scenarios, cryptocurrency is earned in the form of ordinary income and not capital gains. This includes cryptocurrency received from mining, staking, or earned interest.
Many individuals do not have any sort of crypto income as they have just been speculating on price by buying/selling/trading on exchanges. But for those who have been earning crypto, this income needs to be included with your tax return.
Crypto income should be reported in one of two ways: either as personal income or as self-employment income. For a complete walk through, please read our article on crypto mining taxes.
Cryptocurrency that you’ve earned personally (not as a self-employed person) needs to be reported on Schedule 1 “Additional Income and Adjustments to Income.” Your total crypto income should be entered onto line 8: Other income.
On the other hand, if you run a cryptocurrency mining operation or are receiving cryptocurrency income as a self-employed person (sole proprietor, independent contractor, member of a partnership, or are otherwise conducting business for yourself), your cryptocurrency income needs to be reported on Schedule C.
If you are reporting your crypto income from a home crypto mine as self-employment income on Schedule C, certain deductions like electricity and other costs may be able to be deducted.
Now that you have completed 8949 and included your crypto income, you can complete the rest of your tax return.
Instead of doing this by hand, today many crypto investors are leveraging cryptocurrency tax software like CryptoTrader.Tax to handle their crypto tax reporting.Just select each exchange you've used and import your historical transactions from that exchange with the click of a button. CryptoTrader.Tax automatically generates your crypto tax forms based on this data. You can then upload your reports directly into TurboTax or TaxAct to include with the rest of your tax return.
Alternatively, you can simply send your generated forms to your tax professional to include with your tax return. Learn more about how CryptoTrader.Tax works here. Getting started is completely free.
Disclaimer - This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.