Gather Your Crypto Trading Information
The first step to reporting crypto taxes is to get all of your transactions and trading history together. The easiest answer to how to report crypto on taxes is to use crypto tax software.
With ZenLedger you can use API connections to connect to your wallets. ZenLedger as a crypto tax software can talk to many exchanges including Coinbase, Coinbase PRO , Binance, Gemini, BitMex, Kucoin, and many other exchanges. This allows for a very fast import of your transaction history and very accurate accounting.
We have step-by-step instructions for you to make this as easy as possible. This also means loading all of your wallet activity. This is so our system can see all of your non-taxable self transfers and your trading fees- which means that you wonât overpay when you file your taxes. We can also load in transactions using simple spreadsheets, called CVS’s. You can create them yourself or download them from exchanges and wallets.
How To Report Your Capital Gains/losses
Hereâs an example of an investor calculating and reporting a capital gain.
Unfortunately, these calculations arenât 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.
Easily Import Your Trades
Add your exchange accounts via API or CSV files and connect your blockchain wallets using public addresses.
- DeFi, Margin trades & Futures. Whether you are staking on Kraken, lending on Nexo or going long on BitMEX. Koinly can handle it all.
- Smart transfer matching. Koinly uses AI to detect transfers between your own wallets and keep track of your original cost.
“I switched to Koinly last month and really loving it so far. Much better than cointracking. Good job!”
“It was easy to sync my accounts, the tax report was in good format and approved by BZSt. Great support.”
“Team is very supportive, helped me import my Bibox transactions and guided me all the way. I have invited some of my friends to Koinly too and they are thanking me :D”
Don’t Miss: How Much Cryptocurrency Should I Buy
Traded Cryptocurrency In 2021 Heres How To Approach Taxes
Professionals have a major piece of advice for those who traded cryptocurrency for the first time last year: Take your tax prep seriously.
The IRS has been zooming in on cryptocurrency reporting with increasing interest in recent years. And the last thing you want is to lose money and time reconciling your tax liability, says Douglas Boneparth, a New York City-based certified financial planner.
So as tax season gets into full swing, heres a quick guide to which cryptocurrency activity is reportable, how its generally taxed and the best ways to prepare.
Not All Crypto Activity Is Taxable
Good news! Just because you own crypto doesnt mean you owe taxes. If you bought crypto and havent disposed of it, you have no taxable activity to report. Nontaxable activities include:
- Transferring assets between exchanges
- Gifting cryptocurrency
- Donating cryptocurrency .
While donating cryptocurrency is not a taxable event, it is recommended that you do report the donations on your tax return because you may be eligible for the itemized charitable deduction.
Read Also: How To Get Into Blockchain
How To Report Cryptocurrency On Your 2021 Federal Returns
Posted on March 31, 2021 |
If you invested in cryptocurrency in 2020, you have an obligation to report any gain or loss from your investments on your 2021 federal returns. Cryptocurrency transactions have tax implications under the Internal Revenue Code, andthe IRS has made clear that it will be targeting taxpayers who underreport and underpay their cryptocurrency-related tax liability in 2021. Here, Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, provides an overview of what U.S. taxpayers need to know about reporting cryptocurrency on their annual returns.
Transfer Your Details To Schedule D
Once you’ve filled out each necessary Form 8949 and tallied up the final amounts, transfer the totals over to Schedule D. Thats the supporting schedule of Form 1040 where you report your total capital gains and losses for the tax year.
Make sure to double-check that your Forms 8949 add up to the totals that you report on Schedule D.
The IRS will investigate any discrepancies, and you may have to pay penalties or interest if you accidentally underreport on your Schedule D.
Note that you can decrease your tax liability with any crypto capital losses by reporting them here. You can use these losses to offset your gains through crypto tax-loss harvesting, and even if you don’t have any gains to net them against in the tax year you incur them, you can deduct up to $3,000 against your ordinary income.
You can then carry the remainder forward for future years.
Also Check: Should I Pay Bitcoin Blackmail Email
Calculate The Crypto Cost Basis
The cost basis of an asset is its cost to you . Note this includes transaction costs, meaning exchange fees should be included when determining the basis.
Bitcoin as Income: The Concept of Fair Market Value
The basis of a cryptocurrency received as income is a bit different. Since you didnât actually pay anything, the initial basis is 0, however, you must declare the USD value of the amount received as ordinary income. For example, if you earned some bitcoins consulting, and at the time you were paid the BTC was worth $4,000, that is your basis. Thus, your basis in cryptocurrency that was received as income is the Fair Market Value when you were paid.
Bitcoin Income As gifts or Inheritance
Gift recipients receive the gifter’s basis, so if a recipient receives a batch of crypto that was purchased for $1, and sells for $7,000 upon receipt, the recipient has a $6,999 gain per coin . For inheritances, the recipient can elect to have a âstep-upâ in basis to the FMV at the time of inheritance, rather than the decedentâs purchase price.
Register To File Crypto Tax With Hmrc Online
If youre submitting your Self Assessment Tax Return by post – you can skip this step and go straight to step 3. Keep in mind you have an earlier deadline of the 31st of October.
If youve registered to file a Self Assessment Tax Return online before – you dont need to do this again. Just .
For crypto investors who havent filed a Self Assessment Tax Return online before – you need to register by the 5th of October 2021. The steps are slightly different depending on whether youre self-employed or not.
If you’re self-employed, sign into your business tax account and add Self Assessment. You’ll need your Government Gateway user ID and password to do this – so you might need to create one. You’ll get a letter with your Unique Taxpayer Reference within 10 days . You’ll get a second letter with the activation code for your account. Once your account is activated, you can file your tax return anytime before the 31st of January 2022.
If youre not self-employed, register using form SA1. Once you’ve registered, you’ll get your UTR within 10 days . Create your online account using your UTR and sign up for Self Assessment online. You’ll get an activation code sent to you in the post within 7 days of signing up . Once your account is activated, you can file your tax return anytime before the 31st of January 2022.
For this reason, we recommend that you file your taxes as before the 31st of January to ensure youre not left in the lurch with a large tax bill!
Also Check: How To Calculate Crypto Gains And Losses
Calculate Your Crypto Gains And Losses
Every time you dispose of your cryptocurrency, youâll 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 â
To calculate your gain or loss from each transaction, youâll need to track how the price of each one of your assets changed from the time you originally received them.
Hereâs a formula you can use:
Then, your capital gains and losses for your relevant cryptocurrency transactions should be reported on Form 8949.
How Do You Report Crypto On Your Taxes
If youâre like most cryptocurrency investors, you likely have only bought, sold, and traded crypto via a cryptocurrency exchange. This crypto income is considered capital gains income and is reported as such.
On the other hand, if you earned cryptocurrencyâwhether that’s from a job, mining, staking or earning interest rewardsâthat earned income is generally treated as ordinary income and is reported as such.
We dive into the reporting for each of these income types below.
Don’t Miss: How To Find Free Bitcoins
When Youll Owe Taxes On Cryptocurrency
Because the IRS considers virtual currencies property, their taxable value is based on capital gains or losses basically, how much value your holdings gained or lost in a given period.
When you trade cryptocurrencies or when you spend cryptocurrency to buy something, those transactions are subject to capital gains taxes, because youre spending a capital asset to get something or get another asset, says Shehan Chandrasekera, CPA, head of tax strategy at CoinTracker.io, a crypto tax software company.
The difference between the amount you spent when you bought or received the crypto and the amount you earn for its sale is the capital gain or capital loss what youll report on your tax return. Broadly speaking, if you bought $100 worth of Bitcoin and sold it for $500, youd see a capital gain of $400. If your Bitcoin lost value in that time, youd instead face a capital loss. If your losses exceed your gains, you can deduct up to $3,000 from your taxable income .
The amount of time you owned the crypto plays a part, too. If you held onto a unit of Bitcoin for more than a year, it would generally qualify as a long-term capital gain. But if you bought and sold it within a year, its a short-term gain. These differences can affect which tax rate is applied. The tax rate also varies based on your overall taxable income, and there are limits to how much you may deduct in capital losses if your crypto asset loses value.
Is Crypto Taxed Like Stocks
Crypto is taxed like stocks and other types of property. When you realize a gain after selling or disposing of crypto, you’re required to pay taxes on the amount of the gain. The tax rates for crypto gains are the same as capital gains taxes for stocks.
Part of investing in crypto is recording your gains and losses, accurately reporting them, and paying your taxes. Like every investor, you want to keep this tax burden to a minimum. In closing, let’s look at a few effective ways to minimize crypto taxes:
- Hold successful crypto investments for more than one year before selling or using them. Tax rates on these long-term gains are lower than rates on short-term gains.
- Use tax loss harvesting. If you’ve had gains and losses on different types of cryptocurrency, you can sell both and use the losers to offset your gains.
- Consider opening a crypto IRA. Like other IRAs, this type of account lets you make tax-deductible contributions and only pay taxes when you withdraw funds.
Also Check: Can You Buy Bitcoin On Ameritrade
Expenses For Business Mining
If you are considered doing cryptocurrency mining as a business, you have much better options for deducting related expenses. Any ordinary and directly related expenses like home office, start-up costs, and electricity are deductible against your income.
The general rule is that you need to prove all expenses reported on Schedule C. For example, if you are deducting your electricity costs, you need to prove the actual costs directly related to the mining activity. This can be done using a separate electric meter for your mining rig.
Do I Have To Pay Crypto Taxes For Play
If the rewards received from play-to-earn crypto/NFT games have value, then theyre considered ordinary income.
As these types of games become more popular, weve seen increasingly complicated situations arise. For example, in Axie Infinity, Managers and Scholars can work together and share rewards. These setups can create unexpected tax burdens and we recommend speaking to a tax professional before getting started.
Also Check: Can You Sell Bitcoin For Cash
Include Form 8949 With The Form 1040 Schedule D
The Form 8949 is included with the Form 1040 Schedule D, which reports your overall capital gains and losses. On this form, you list your totals separately for short term and long term capital gains and losses.
The Schedule D also includes gains and losses from Schedule K-1s from businesses, estates, and trusts of which you are a part. It also is where you will report capital losses carried forward from previous years or those that you wish to carry forward to future years.
How Is Crypto Income Taxed
Crypto income is taxed as ordinary income at its fair market value on the date the taxpayer receives it.
Here are the most common examples of what’s considered crypto income:
- Receiving crypto as payment for providing a service
- Staking crypto and earning rewards
- Lending crypto and receiving interest payments
Irs Considers Crypto As Property
Cryptocurrency is subjected to taxes overseen by the Internal Revenue Service . The Internal Revenue Service issued Notice 2014-21 in 2014 that stated cryptocurrency is considered âpropertyâ and not currency.
Simply put, cryptocurrency is treated the same as stocks, bonds, and other assets that qualify for capital gains taxes. There are also instances where crypto is treated as income and thus qualifies for income taxes.
Letâs understand this concept with an example. Kate bought $20,000 of Ethereum in August 2021 and sold it in October 2021 for $25,000, Kate would realize $5,000 as a capital gain.
On this capital gain, the amount of tax that must be paid by Kate is dependent on the tax bracket and the holding period .
But what if Kate hadnât bought the crypto ?
If she had received cryptocurrency through mining, airdrops, or as interest from lending, her income would then be subject to income taxes, the rate of which would depend on the income slab she comes under.
Now, the next question that could come to mind is – how will the tax be calculated? For this calculation, it is crucial to understand three essential concepts:
- Fair market value
- Cost basis
Don’t Blindly Rely On Exchange
Note that the tax forms you download from an exchange may not be entirely complete and accurate if you use multiple exchanges & wallets, frequently transfers coins in and out of those platforms, use decentralized exchanges or self-custody assets.
If this is the case, it is highly recommended to use a crypto tax software to reconcile your cryptocurrency activity across multiple exchanges & wallets and arrive at the correct capital gain amount which you have to pay taxes on.
Now that you know which tax reports to expect from exchanges and what they mean, let’s see what IRS tax forms you need to file with your personal income tax return to comply with crypto taxes.
Recommended Reading: How To Make Your Own Crypto Trading Bot
How Are Airdrops Taxed
Cryptocurrency received from an airdrop is taxed as income. This means that you are liable for income taxes on the USD value of the claimed airdrop. If you sell, trade, or otherwise dispose of your airdropped tokens in the future, you will incur capital gains or losses depending on how the price of your tokens has fluctuated.
The IRS is clear in its guidance regarding the income treatment of airdrops.
Form 8949 & Schedule D
Form 8949 is used to report your cryptocurrency & NFT gains and losses. If you receive a complete and accurate 1099-B from an exchange you can enter those numbers on this document. If you traded NFTs, you would have to rely on your manual records or connect your Metamask wallet to a cryptocurrency tax software to get the numbers needed to fill out this form.
Schedule D summarizes what you reported on Form 8949. This schedule will also show your stocks & security gains & losses.
You May Like: How To Start Using Bitcoin
How To Prepare For Tax Season When You Have Crypto
The best thing you can do to simplify your crypto-related 2021 tax filing is start planning ahead now. Dont wait until April 1, 2022, to begin gathering your reports and figuring out what you owe, even if thats how you typically approach tax season.
You do not want to be in the situation on April 14 where youre trying to catch up with one years worth of crypto activity, White says. You really want to treat it more like a business, where on a monthly basis you are making sure that all of your taxes are up to date, making sure you are tracking things correctly, being more proactive about it.
If youre just dipping your toes into trading Bitcoin or another cryptocurrency, and only have a few transactions , you may be able to easily report your crypto earnings yourself using your typical tax software.
Most people are pretty simple: they have a W-2, they have a couple 1099 interest forms, and they may have some crypto, Chandrasekera says. So those people dont really need a CPA. But if youre somebody dealing with large amounts of money, youre making DeFi transactions, staking or mining operations, those people will want to have a CPA to sit down and do tax planning and tax-saving strategies.