As cryptocurrencies and blockchain assets gain more popularity and become widely adopted, the United States Internal Revenue Service (IRS) has shown increasing interest in their taxation. It is important to accurately track and report crypto transactions to avoid penalties and fines. To help with this, here is a comprehensive guide on tracking and reporting crypto transactions for tax purposes in the U.S.
Taxation of Cryptocurrency in the U.S.
If you invest in crypto assets, such as nonfungible tokens (NFTs), and make transactions for gains, you need to be prepared for crypto taxation. It’s important to note that simply buying crypto or witnessing its value fluctuate in your portfolio is not taxable. Taxes are only due when you sell, invest, or dispose of the asset for gains.
Cryptocurrency is subject to two types of taxation: capital gains tax and income tax.
Capital Gains Tax
This applies to profits earned from selling an asset that was purchased at a lower price. Any gains made from selling or trading a digital asset for a higher price than the purchase price are subject to capital gains tax. If the crypto assets were held for less than a year, it is considered a short-term gain. If it was held for more than a year, it is regarded as a long-term gain.
Capital gains events include selling cryptocurrency for fiat currency, sending cryptocurrency (over $15,000) as a gift, purchasing goods and services with cryptocurrency, and trading or swapping one digital asset for another. It is crucial to accurately track all crypto transactions for tax purposes, and declaring capital losses can offset capital gains tax.
Income Tax
Income tax on cryptocurrency transactions applies to earnings from mining and staking tokens, receiving cryptocurrency from airdrops, earning crypto interest from decentralized finance (DeFi) lending, and receiving cryptocurrency as payment for labor.
Long-Term and Short-Term Tax Rates
Long-term cryptocurrency tax rates apply to gains on cryptocurrencies held for over a year. For single individuals, no tax is levied on crypto gains up to $44,625. For individuals filing as heads of household or married couples filing jointly, the rates range from 0% to 20% based on income tax brackets.
Short-term crypto gains, on the other hand, are taxed as ordinary income tax rates. These rates range from 10% to 37% based on income brackets for single filers, married couples filing jointly, and heads of household.
When is Cryptocurrency Not Taxed?
There are certain cryptocurrency transactions that are not subject to capital gains or income tax. These include purchasing cryptocurrency with fiat currency, holding cryptocurrencies without selling them, moving cryptocurrency between your own wallets, gifting cryptocurrency amounting to less than $15,000, donating cryptocurrency to charities (which may be tax deductible), and creating an NFT without selling it.
Tracking Crypto Transactions
Accurately tracking and reporting all cryptocurrency transactions is essential, and consulting a tax professional is recommended to fulfill all obligations. There are purpose-built crypto tax software solutions available for tracking and generating reports. Popular options include Koinly, CoinLedger, and Accointing. Alternatively, you can track and report crypto transactions yourself by following these steps:
1. Identify and organize all cryptocurrency transactions, including trades, purchases, and sales. Make a list of the type of cryptocurrency or asset, the date of the transaction, the amount, the value at the time of the transaction, and relevant wallet addresses.
2. Calculate the cost basis for each transaction, including the purchase price, fees, and any other costs incurred.
3. Determine the gain or loss on each transaction by calculating the difference between the cost basis and the fair market value of the cryptocurrency at the time of the sale or trade.
4. Separate your short-term and long-term transactions based on how long you’ve held the crypto asset.
By keeping accurate records and staying informed on the latest tax guidelines, you can navigate the tax implications of your cryptocurrency investments. While there are still uncertainties regarding taxing crypto, the IRS is continuously working to address them.
Reporting Crypto Holdings on Taxes
After accurately tracking your crypto transactions, you need to report them to the IRS for tax purposes.
Reporting Capital Gains and Losses
The crypto tax Form 8949 is used to report the sales and disposals of capital assets, including cryptocurrencies. It consists of two parts: Part I for short-term disposals and Part II for long-term disposals. You need to check the relevant box at the top of the sheet based on whether your transaction was reported on Form 1099. If exchanges do not issue Form 1099-B for crypto transactions, you will likely need to select option C on Form 8949.
To fill in the details on Form 8949, provide a description of the crypto asset sold, the date of acquisition, the date of sale or disposal, the fair market value, the cost basis, and the gain or loss. Once Form 8949 is filled out, the total gain or loss should be reported on Schedule D of Form 1040.
Reporting Crypto Income
Report all crypto income on Form 1040, along with capital gains or losses from crypto transactions. Form 1040 has a specific question regarding crypto income and transactions. Earning crypto as a business entity, running a mining income operation, or receiving staking income is treated as self-employment and must be reported in Schedule C of Form 1040. Other sources of crypto income, such as airdrops, forks, wages, and hobby income, are usually recorded as “other income” on Schedule 1 of Form 1040.
Consulting a tax professional is advisable to ensure accurate filing of cryptocurrency taxes and reporting them correctly on your tax return. Please note that this article does not provide financial, tax, investment advice, or recommendations. It is important to conduct your own research and make informed decisions when it comes to investments and trading.