How to Report Bitcoin, Ether, Other Crypto on Your IRS Tax Return

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Every year, millions of Americans gather their W2s and 1099s, fire up their tax software (or send piles of documents to their accountants), and prepare to file their tax returns. For some, it’s a smooth process, but for others with more complicated financial situations, it can be a pain.

And for those who have been involved in the cryptocurrency markets, taxes can be downright tedious. But if you break the process down into a few steps, it might be easier to navigate.

How to declare cryptocurrency on your taxes

Crypto is taxed as property by the IRS, meaning investors pay no taxes on their assets when they buy or hold them, only when they sell or trade them. “It has to be transactional for there to be a tax,” says Texas-based CPA Jeremy Johnson.

This means that crypto is largely in the same category as assets such as stocks or real estate – selling it, exchanging it for another crypto, or using it to buy a good or service triggers a taxable event. .

As for reporting requirements? There is a simple yes or no question on Form 1040 that asks if you received, sold, traded, or disposed of virtual currency during the tax year. If you tick “yes”, then you will need to attach another form to your declaration with more details.

Here are the five steps to declaring crypto on your 2022 taxes.

1. Gather your transaction history

This first step can be difficult, depending on your activity in the crypto markets over the past year and your ability to keep records and stay organized.

Many variables are also in play – some exchanges and platforms may send you tax documents, namely 1099s, detailing your trading history from the previous year, or make them available for download in your account. Others, including decentralized exchanges, might not.

“Some platforms do a good job, but if you’re a big trader, it might be best to seek out a professional service to try and help you keep track of all of this – that can be a lot, especially if you’re using multiple exchanges,” says Johnson.

Whether you can get your hands on these documents or not, you’ll need information about every transaction you made in the past year and use that information to complete Form 8949. This shows the IRS that you made a good effort of faith to do the math and give them an estimate of what you owe.

The information you need for each transaction includes the following, which must be reported on Form 8949:

Description of the property: what is the asset (bitcoin, for example) and the quantity traded. Date of acquisition: the month, day and year you first acquired possession of the asset. Date of Sale or Disposal: The month, day, and year you disposed of the asset. Proceeds: The amount or value you received in exchange for the crypto. Cost or other basis: How much you originally paid for the asset when you first acquired it. Gain or Loss: If for some reason you need to revise an asset’s cost basis, do so here. Gain or loss: the difference between the proceeds and your adjusted basis.

Quick Tip: If you have used multiple platforms to trade crypto or have assets in multiple wallets, experts recommend using crypto tracking software to streamline your transaction history, such as CoinTracking, Koinly or CoinLedger.

2. Calculate your wins and losses

Next, it’s time to do some math, but don’t worry too much because calculating your capital gains or losses isn’t too complicated. And if you’re wrong, the IRS is unlikely to let you go.

“Just try to make a good faith estimate of your income from your crypto-trading activity. Don’t report numbers you don’t believe to be true,” says Clinton Donnelly, president and founder of CryptoTaxAudit, a tax firm that works exclusively with crypto traders and defends people during IRS audits.

At the top of Form 8949, you will need to check one of three boxes – this relates to whether or not your transactions have been reported to the IRS. Again, not all exchanges produce 1099s.

From there, it’s all about doing the math to calculate your wins or losses. Johnson says the calculation itself isn’t that hard if you have the numbers to run the formula.

The formula itself is nothing more than subtracting your cost base (the amount you originally paid for the asset) from your realized amount, or proceeds (how much you received when you sold it) . If it’s a positive number, you have a gain — if it’s negative, you have a loss.

Product – cost base = capital gain or loss

Here’s what it might look like for a trader who only made a few trades during the year:

Transaction 1: Bought 1 BTC for $10,000 and sold it four months later for $15,000

$15,000 – $10,000 = capital gain of $5,000

Transaction 2: Bought 3 ETH for $3,500 and sold them six months later for $2,000

$2,000 – $3,500 = -$1,500 capital loss

Transaction 3: Bought 10,000 Dogecoins for $5 and sold a week later for $7

$7 – $5 = – $2 capital gain

Note that these are all simplified examples of short-term holdings, which are assets held for less than 12 months. You must repeat the process on a separate part of Form 8949 for long-term holdings.

Although the math is quite simple, experts say it’s easy to get overwhelmed when there’s a lot of transaction data to consider. For this reason, it may be a good idea to hire a professional or use tax software that calculates the numbers for you.

3. Calculate your totals

Once you have calculated your gain or loss for each trade, you will need to add it all up and insert the total at the bottom of the form.

Not every column needs a total, and the most important goal you’re trying to achieve is to get an overall total for your cost base (how much you originally paid for your assets), your proceeds (what you received, in total, from the disposal of your assets), and your overall capital gain or loss from your crypto trading activity.

4. Report your net gain or net loss on Schedule D

The hardest part is largely done. Take the numbers you calculated on Form 8949 and report them on another form: Schedule D.

Schedule D is a summary of your capital gains and losses for the year, while Form 8949 is an additional form to show the IRS that you did the actual work of accounting for everything.

It is also a fairly simple form to fill out: just follow the steps outlined there, report your figures for your short and long-term holdings, and then come up with an overall figure for your your annual capital gain or loss.

Note: While you should do your best to report accurate numbers to the IRS, you’re unlikely to trigger an audit by making a small miscalculation, experts say. To avoid mistakes, consider working with an accountant or using sophisticated online tax software.

5. Report any crypto income on Form 1040

Besides your crypto capital gains and losses, you may also have received additional income from your crypto holdings. Examples include staking, acquiring crypto as a form of payment, airdropping, mining, or even earning coins or tokens through play-to-win games.

In these cases, you will need to report the crypto as income rather than a capital gain or loss. It will be taxed as ordinary income, depending on your applicable tax bracket.

You will also need to report any crypto income using another additional form – either Schedule 1, Schedule B or Schedule C, depending on how you received the income. For example, if you were paid in crypto to perform a service, you would report that on Schedule C, while assets received via an airdrop would need to be reported on Schedule 1.

What happens if I don’t declare crypto on my taxes?

Reporting crypto activity on your tax return can be a tedious task, depending on how active you have been as a trader. For this reason, it may be tempting to delete it or simply not report anything. It can be a big mistake, experts warn, and can come back to bite you.

“The IRS has two methods: If you don’t report all of your activities, your tax return is simply inaccurate and you could be hit with a 20% inaccuracy penalty plus interest,” Donnelly says.

“But if you don’t file and the IRS finds out about it — and they know you didn’t report it — that’s tax evasion,” he says. “This is punishable by a fine of up to $250,000 and up to five years in prison for each year of non-reporting.”

The IRS is stepping up crypto enforcement, so your best bet is to report your numbers to the best of your ability, or get help if you don’t know how to do it right.

“It can open a Pandora’s box if you don’t flag your crypto,” says Johnson. “So no matter how big your earnings are, report your activity.”

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