Reporting your Crypto Transactions
Helpful Information. Yes, your crypto income is taxable in the United States. Cryptocurrency has gained incredible popularity in the past few years, with many people investing in it and businesses accepting crypto as payments. But one question seems to be unanswered for many crypto buyers, sellers, miners, and users. Are cryptocurrency transactions taxable? Well, the answer to this is – yes, at least in the U.S. The Federal Internal Revenue Service (IRS) of the U.S. has clearly defined what virtual currency is and has acknowledged Bitcoin as an example of virtual currency that can be exchanged into U.S. dollars. But along with this, the IRS also states the tax consequences of dealing in virtual or digital assets, including receiving new coins from a hard fork.
The IRS issued a offering Income Tax Preparation guidance on the tax treatment of cryptocurrency transactions for individuals and businesses. Robinhood Crypto tax reporting requires a preparer who understands crypto.
Why is cryptocurrency taxable in the U.S.?
The reason why cryptocurrency is taxable like real currency is that the IRS defines crypto or virtual currency as a digital representation of the value in real currency, such as digital currency and cryptocurrency. It can be used as a medium of exchange. It can also function like a unit of account as well as a store of value, similar to real currency. Cryptocurrency, which uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain, is not considered legal tender in any of the jurisdictions throughout the country, but it still operates like the coin and paper currency in the U.S. does.
Additionally, an important aspect to consider in the taxation of cryptocurrency is the impact of hard forks. A hard fork is an event where a single blockchain splits into two separate, parallel chains. Holders of coins on the original chain could also receive coins on the new unique chain after the hard fork’s split. Furthermore, another tax event that needs to be taken into account is the receipt of a new digital asset as a result of mining or staking activities.
Owing to the fact that convertible cryptocurrencies like Bitcoin can be exchanged, traded, or sold to earn real money, crypto is treated as property for all Federal tax purposes. From a tax perspective, crypto is viewed as property, similar to vintage artifacts or coin collections, for instance, which are subject to taxes on the income earned from their sale. So, all the taxes that apply to property transactions also apply to cryptocurrency. This is why cryptocurrency is taxable in the U.S.
What types of cryptocurrency transactions are taxable?
Your cryptocurrency transactions may be taxable under various situations. These include –
- Mining Crypto in any fashion is Taxable as a business
- Then Selling crypto mined by yourself to someone is another Taxable event (capital gains)
- Selling of cryptocurrency bought from someone to a third party
- Buying goods or services with cryptocurrency mined by you
- Buying goods or services with crypto you have bought from someone
- Exchanging one crypto for another crypto
All of these transactions, including the purchase and sale of btc, are considered capital gains and are taxable under the general Tax rules. In the case of cryptocurrency that you have mined yourself, the gains will be taxed as personal or business income. This means the expenses borne by you for mining the crypto will be deducted from the income to calculate the taxable income. But in this case, the mining has to be a trade or self-employment.
It won’t apply if you mine cryptocurrency as an employee. The seller must report the transaction as gross income based on bitcoin’s fair market value at the time of the transaction. The seller must also realize a capital gain or loss when they exchange the bitcoin for fiat currency or use it as payment. A client who loses money from a crypto sale can report a capital loss. Each needs to be reported at tax time.
How to ensure compliance with cryptocurrency tax rules?
Like all other Taxes, you will be subject to penalties if you engage in tax evasion and do not adhere to the cryptocurrency tax laws that the IRS has made public in 2014. So, it is important to keep track of your cryptocurrency transactions and report your income when filing your tax Returns.
To ensure compliance with tax rules and avoid tax evasion, it is advisable that you keep records of your crypto transactions, including receipts of purchase and sale, as well as records of transfers and transactions from all your crypto wallets and exchanges. Additionally, it’s your responsibility to stay educated on potential tax liabilities for dealing with digital assets such as BTC, ETH, and NFTs. We have a dedicated guide on NFT taxes, but the IRS has recently released new guidance on the tax treatment of NFTs, so we’ll cover it here too.
Proper Tax Records are Necessary
You must keep records of the fair market value and cost basis of the virtual currency you mined, sold, used, or traded. The value of your crypto keeps changing every second. So, it is important to record the fair market value when you mine/buy a cryptocurrency and again when you sell it/use it for purchases. When exchanging cryptocurrency for fiat money, you’ll need to know the cost basis of the virtual coin you’re selling.
The cost basis for cryptocurrency is the total price in fees and money you paid. When you exchange your crypto for cash, you subtract the cost basis from the crypto’s fair market value at the time of the transaction to get the capital gains or loss. The IRS allows multiple cost basis methods for calculating your crypto tax bill, and one of these methods is First In First Out (FIFO), where the first asset you bought is the first asset you sell. Coinbase customers will be able to generate a Gain/Loss Report that details capital gains or losses using the cost basis specification strategy in their tax center settings: customers can choose between a HIFO (highest in, first out), LIFO (last in, first out), and FIFO (first in, first out).
Tax reporting for cryptocurrency transactions and Basis
Tax reporting for cryptocurrency transactions is treated the same way in the U.S. as Tax reporting for property transactions. Transaction on your crypto assets and your Capital Gains and Capital Losses during the tax year must be reported. A payment that you make in cryptocurrency is also subject to information reporting. Take a minute and read our information on tax software to track basis.
Furthermore, there are important forms that you will need for reporting Taxes on your crypto transactions are the following.
Form 8949
The IRS Form 8949 is used for reporting capital gains and losses from your investments. If you have any capital gains or losses from cryptocurrency transactions, the information to be filled in this form can be gathered from your transaction reports provided by various crypto exchanges.
Form 1040 (Schedule D)
The IRS Form 1040 or Schedule D, also known as the Individual Income Tax Return, is used to report the summary of all your capital gains and losses, including any financial interest in digital assets. The difference between capital gains and losses is called net capital gain or loss. Since 2019, the IRS has included a question specifically related to cryptocurrency transactions during a Tax year on the Form 1040. So, it is important to ensure that you declare your transactions, including any financial interest in digital assets and any crypto losses, on this form as well.
Form 1099
IRS Form 1099 has several versions. Form 1099-B is for reporting your proceeds from broker exchanges, including digital asset brokers, as outlined in the Infrastructure Investment and Jobs Act (IIJA). In the case of stocks, your brokers would themselves send you Form 1099-B showing the details of your transaction. With cryptocurrency exchanges, this has not been the case in the past, but the IRS will require it in the future for crypto transactions.
Form 1099-K is required if you cross a threshold limit of transactions beyond $600 in payments in a year. These 1099-Ks will be issued by credit card companies and third-party payment processors like Stripe, PayPal, Cash App, or Venmo. If you transfer money between friends or family you need to report it as such to the payment processor otherwise you may have to report it to the IRS.
Form 1099-MISC is for reporting any payments made in your trade/business, excluding those made to employees or as compensation to non-employees.
Yes, Crypto is Taxable
You must report any crypto activity on your Tax Returns. Cryptocurrency may still not have gained the stature of legal tender, but in the Federal U.S., your income from crypto is still considered taxable income, including ordinary income. As a taxpayer, you are responsible for reporting all your cryptocurrency gains next season, taking into account the tax implications. The primary reason why many crypto users and traders end up paying huge amounts in penalties is that they are unaware of their Tax liabilities. Now that you know, you will be able to make better decisions and ensure compliance with your Taxes.
The amount of income you report establishes your cost basis. Additionally, when you donate crypto to a registered charitable organization, you won’t realize a capital gain or loss, so you won’t pay Capital Gains Tax. Moreover, you can even claim charitable donations as a tax deduction, allowing you to reduce your taxable income. Your charitable contribution deduction will be the fair market value of the crypto on the day you donated it. NFTs deemed collectibles may be taxed at 28%. Getting an airdrop: You might receive airdrops from a crypto company as part of a marketing campaign or giveaway. Getting an airdrop is taxable as income, and you’ll need to report the amount in your taxes. See the latest IRS guidance on airdrops.
FAQs
How are IRS taxes on cryptocurrency calculated?
Taxes on cryptocurrency are calculated based on the gains or losses from buying, selling, or exchanging crypto. The taxable amount is determined by subtracting the cost basis (purchase price) from the fair market value at the time of the transaction. It is important to keep accurate records for tax purposes.
What should I do if I made a profit from selling cryptocurrency?
If you made a profit from selling cryptocurrency, it is important to report it on your taxes. Consult with a tax professional to understand the specific rules and regulations in your jurisdiction. Keep accurate records of your transactions and any associated costs to ensure compliance with tax laws.
Are there any tax exemptions for cryptocurrency investments?
No, there are no tax exemptions for cryptocurrency investments. The IRS treats crypto as property for tax purposes, which means that capital gains taxes apply when you sell or trade crypto. It is important to report all crypto transactions and consult a tax professional for guidance.
How does the government track transactions in cryptocurrencies for tax purposes?
The government tracks transactions in cryptocurrencies for tax purposes through various methods. These include utilizing blockchain analysis tools, cooperation with cryptocurrency exchanges to obtain transaction data, and conducting audits and investigations to ensure compliance with tax laws.
What are the penalties for not reporting cryptocurrency transactions on your taxes?
Penalties for not reporting cryptocurrency transactions on your taxes can vary depending on the jurisdiction, but they often include fines, interest, and potential criminal charges. It is important to accurately report crypto transactions to avoid these penalties and ensure compliance with tax laws.