Every year, millions of Americans prepare to file their tax returns, gathering W-2s, 1099s, and other essential documents, and many rely on tax software or accountants to navigate the process. For some, it’s a smooth experience, while others—especially those involved in more complex financial activities like cryptocurrency trading—can find it challenging. However, with the right approach, understanding how to report your crypto activity can become more manageable.
Taxable Events for Cryptocurrency
The IRS treats cryptocurrency as property, not currency. This means you’re not taxed when you buy or hold crypto but when you sell, exchange, or use it in a transaction. As certified public accountant Jeremy Johnson explains, “It has to be transactional for there to be a tax.”
Cryptocurrency transactions—like selling it, swapping one crypto for another, or spending it on goods or services—trigger taxable events. Similarly, profits from activities such as mining and staking are taxable.
To begin reporting your crypto transactions, the IRS asks a simple yes-or-no question on Form 1040: “Did you receive, sell, exchange, or dispose of any virtual currency during the tax year?” If you answer “yes,” you’ll need to attach Form 8949 to provide detailed transaction information.
Calculating Your Crypto Gains and Losses
1. Gather Your Documents
Start by gathering the necessary documents, including transaction records from exchanges or platforms where you traded or mined cryptocurrency. Some platforms may send you 1099s summarizing your transactions for the year, while others, especially decentralized exchanges, might not provide these.
Experts recommend estimating your income based on your transactions but always ensure the figures you report are accurate. You’ll need to list the details of each transaction on Form 8949, which helps show the IRS that you’ve accurately tracked your crypto activity.
For each transaction, you’ll need:
- Description of Property: The type and quantity of crypto (e.g., Bitcoin).
- Date Acquired: When you first obtained the asset.
- Date Sold/Disposed Of: When you sold, exchanged, or used the asset.
- Proceeds: The amount or value you received in exchange.
- Cost or Basis: The amount you initially paid for the asset.
- Adjustments (if necessary): Any corrections made to the cost basis
2. Calculate Gain or Loss
The math isn’t too complicated once you have the necessary information. Simply subtract your cost basis (what you paid for the asset) from your proceeds (what you received when you sold it).
Formula: Proceeds – Cost Basis = Capital Gain or Loss
Here’s how this works with the most recent prices:
- Transaction 1: Bought 1 BTC for $20,000 and sold it for $93,365.84.
$93,365.84 – $20,000 = $73,365.84 capital gain - Transaction 2: Bought 3 ETH for $4,500 ($1,500 per ETH) and sold them for $9,869.76 ($3,289.92 per ETH).
$9,869.76 – $4,500 = $5,369.76 capital gain - Transaction 3: Bought 10,000 Dogecoin for $500 ($0.05 per DOGE) and sold them for $3,300 ($0.33 per DOGE).
$3,300 – $500 = $2,800 capital gain
Note that these examples reflect short-term holdings (assets held for less than 12 months). You will need to repeat the process for long-term holdings.
While the math is straightforward, the volume of transactions may overwhelm some. It’s advisable to work with a tax advisor or use tax software like TaxDo for easier calculations.
3. Calculate Your Totals
Once you’ve calculated gains and losses for each transaction, the next step is adding them up to determine your total gains or losses. You’ll report these totals on Form 8949, which is then transferred to Schedule D.
Schedule D summarizes all of your capital gains and losses for the year. Here, you’ll report your short-term and long-term holdings and calculate the final number for your overall capital gain or loss.
4. Report Cryptocurrency Income
In addition to capital gains and losses, some individuals may have earned crypto as income—whether through staking, mining, airdrops, or as payment for services. This income is treated as ordinary income and taxed according to your income tax bracket.
To report crypto income, you’ll need to use additional forms such as Schedule 1, Schedule B, or Schedule C. For example, income from crypto earned as payment for services is reported on Schedule C, while income from airdrops is reported on Schedule 1.
Recordkeeping for Cryptocurrency Taxes
Maintaining accurate records of your crypto transactions is crucial. The IRS has been increasingly focused on cryptocurrency tax enforcement, and failing to report your activities could lead to significant penalties.
Donnelly warns that not reporting crypto activity is considered tax evasion, which can result in a penalty of up to $250,000 and up to five years of imprisonment for each year of unreported activity.
Using crypto tracking software can help you keep track of your transactions, especially if you’ve used multiple platforms or wallets. These tools can simplify the process of consolidating your transaction history.
Conclusion
Reporting cryptocurrency on your taxes can feel overwhelming, but breaking the process down into steps can make it more manageable. Whether you’re calculating gains and losses, reporting crypto income, or ensuring your documentation is in order, taking the time to get it right is crucial. To avoid mistakes, consider working with an accountant or using comprehensive tax software. Ultimately, by reporting your crypto activity accurately, you can ensure that your tax return remains compliant and avoid potential penalties.
