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Crypto Taxes
Crypto Taxes

How to report cryptocurrency on your taxes in 5 steps

Not sure how to report your cryptocurrency taxes

You’re not alone. As cryptocurrency is still a relatively new space, it’s not always easy to find tax professionals with expertise on the subject. 

To help investors like you, we simplified cryptocurrency tax reporting into an easy-to-follow 5-step process. By the time you finish reading, you’ll understand how to report all of your crypto transactions on your tax return. 

How to report cryptocurrency on taxes

Filing your cryptocurrency gains and losses works the same way as filing gains and losses from investing in stocks or other forms of property.

There are 5 steps you should follow to file your cryptocurrency taxes:

  1. Calculate your crypto gains and losses
  2. Complete IRS Form 8949
  3. Include your totals from 8949 on Form Schedule D
  4. Include any crypto income 
  5. Complete the rest of your tax return

Let’s walk through each one of these steps in detail. 

1. Calculate your crypto gains and losses

Every time you dispose of your cryptocurrency, you’ll incur capital gains or capital losses. These disposal events include, but are not limited to: 

  • Selling your cryptocurrency for fiat 
  • Trading your cryptocurrency for another cryptocurrency 
  • Buying goods and services with cryptocurrency 

To calculate your gain or loss from each transaction, you’ll need to track how the price of each one of your assets changed from the time you originally received them. 

Here’s a formula you can use: 

Capital gains/losses crypto tax reporting

Then, your capital gains and losses for your relevant cryptocurrency transactions should be reported on Form 8949. 

How to report your capital gains/losses

Here’s an example of an investor calculating and reporting a capital gain. 

Reporting crypto on taxes example

Unfortunately, these calculations aren’t always so simple. An active cryptocurrency trader may have thousands of buys and sells in a year, making it difficult to track their original cost basis. 

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.

2. Complete IRS 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.

While you’ll need to report your capital gains and capital losses on Form 8949, you’ll also need the following information on each individual transaction: 

  • A description of the property you sold (a)
  • The date you originally acquired the property (b)
  • The date you sold or disposed of the property (c)
  • Proceeds from the sale (fair market value) (d)
  • Your cost basis for purchasing the property (e)
  • Your gain or loss (h)
Report cryptocurrency on taxes with 8949

Want a demonstration of how to fill out Form 8949? Check out the video below. 

Do I need to report my capital losses? 

Remember, it’s important to include any cryptocurrency capital losses that you’ve incurred during the tax year in this section. After all, every taxable event must be reported to the IRS. 

There’s also a tax benefit to reporting capital losses. Capital losses can offset your capital gains and up to $3000 of personal income. 

Capital loss crypto reporting

For more on this subject, check out our complete guide to tax-loss harvesting.  

3. Include totals from 8949 on Schedule D

Once your 8949 is filled out, take your total net gain or net loss and include it on Schedule D.

Schedule D allows you to report 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.

Schedule D crypto tax reporting

4. Include any crypto income 

In certain scenarios, cryptocurrency is earned through mining, staking, referral bonuses, or though work. You recognize income when earning crypto via these means, meaning that you’ll be subject to income tax.  

What form should I use to report my crypto income? 

The form you’ll need to use to report your crypto income varies depending on your specific situation. 

Schedule 1 - If you earned crypto from airdrops, forks, or other crypto wages and hobby income, this is generally reported on Schedule 1 as other income.

Schedule 1 Line 6

Schedule B - If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.

Schedule C - If you earned crypto as a business entity, like receiving payments for a job or running a cryptocurrency mining operation, this is often treated as self-employment income and is reported on Schedule C. In this case, you may be able to deduct related costs such as electricity. 

Schedule C cryptocurrency tax reporting

5. Complete the rest of your tax return

Now that you have completed 8949 and included your crypto income, you should be finished reporting all the crypto-related transactions on your tax return. Once you’ve finished the rest of your forms, you’ll be able to submit your tax return to the IRS. 

Frequently asked questions 

Let’s cap things off by answering a few frequently asked questions about reporting your cryptocurrency taxes. 

How do I report crypto on my taxes? 

Any cryptocurrency capital gains, capital losses, or income events need to be reported on your tax return. You can report these events on Form 8949 and depending on your specific circumstances, Form 1040 Schedule B, C, and/or D. 

Do I pay taxes on crypto if I lost money? 

Reporting capital losses comes with a tax benefit. Reporting capital losses can offset capital gains and up to $3000 of personal income. 

What happens if you don’t report cryptocurrency on your taxes? 

Not reporting cryptocurrency on your taxes is considered tax evasion. The maximum penalty for tax evasion is a $100,000 fine and 5 years imprisonment. 

Get started with cryptocurrency tax software

There’s no need to fill out your tax forms by hand. Today, more than 100,000 cryptocurrency investors use CryptoTrader.Tax to file their tax return in minutes. 

With a few clicks, you can select each exchange you've used and import all of your historical transactions. 

Based on this data, CryptoTrader.Tax automatically generates your crypto tax forms. 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 the taxation of digital currencies.

Recently updated on
September 21, 2021
Category:
Crypto Taxes

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