Taxes & Cryptocurrency Reporting

Author: Crypto Listings IO    Published: 02/27/22    Views: 1318    Comments: 0


Tax authorities consider cryptocurrencies like Bitcoin as property, which means that they're subject to capital gains taxes when sold or exchanged for another asset like fiat or other cryptocurrencies such as Ethereum and Litecoin. That said, there are some practical concerns when it comes to reporting digital currencies on your taxes. For starters, it's not considered actual currency because it's not issued by a government or backed by one. You can't report Bitcoin or Ethereum as income or an expense — you must treat them as property instead. Since the IRS considers cryptocurrency as property, they will treat your cryptocurrency as realized income. Because of this, most cryptocurrency traders report any gains on their tax returns as capital gains rather than ordinary income.

Short-Term and Long-Term Capital Gains:

The length of time before selling or exchanging the cryptocurrency determines whether or not you have made a long-term or short-term gains. If you possess cryptocurrency for a period of one year or less before selling or spending it, you will likely be subject to the short-term capital gains tax at your ordinary income tax rate. You will generally incur long-term capital gains if you hold a cryptocurrency for more than one year. Reporting crypto assets on your tax return is determined by how you obtained it and how you used it at the point of transaction.

How to Report Cryptocurrency on Taxes:

You can only report cryptocurrency on Capital Gains and Losses (Schedule D and Form 8949). That form requires you to calculate the amount you've "held" for at least a year and the difference between that amount and your cost basis.

Cryptocurrency transactions can be classified as either "property" or "ordinary income." If you're selling cryptocurrencies as an investment, they're property. If you're buying them, they're ordinary income. If you sell your cryptocurrency as an investment, then you have to calculate your capital gains and losses on Form 8949, Schedule D, and attach it to your individual tax return.

Steps to Report Cryptocurrency on Taxes:

Taxes are always tricky, and with cryptocurrency it can be even trickier. But you can correctly report your gains and losses on your tax returns by following a few simple steps.

Step 1: Prepare a list of every exchange and transaction you've made (including any 1099 forms exchanges have sent to you).

Step 2: Make a capital gains or loss calculation based on each transaction.

Step 3: For all property-taxable events, complete IRS Form 8949.

Step 4: Transfer totals from your Form 8949 to your Schedule D on Form 1040.

Step 5: Fill out Form 1040 for any remaining crypto income.

There are some solutions out there that can make this process a lot easier. That brings us to the final section of this article.

Why Should You Use Crypto Tax Software:

The way most people handle taxes can be very time-consuming. A lot of work has to go into it. There's the filing, and then there's the accountants and advisors you have to pay for their time and services.

Crypto tax software makes it easier to report your crypto assets to the IRS and other tax authorities. If you're looking for a way to optimize your crypto tax return, you can't go wrong with crypto tax software. Most are free to use while others require a subscription. Most people will get by with the free solutions while others might see the value in a premium service.

The best crypto tax software is one that can sync your transaction data with the greatest number of exchanges and can generate profit & loss and tax reports. The most reputed crypto tax tools include but are not limited to: TokenTax, Accointing, TaxBit, ZenLedger, Koinly, BearTax, and many more. One of our favorites is CoinTracker. Some of these can even integrate with preexisting Tax software you probably are already using today.

The information outlined above is a good start helping you file your taxes easily and efficiently but do note, is not a tax professional or financial adviser. You should consult a local tax professional in your area if you have any questions on reporting your crypto or filing your taxes in general. Also, if you think you can avoid paying taxes on your crypto you should rethink that. Many of the exchanges are required to report your information directly to the IRS. So, unless you want to find yourself deep in a audit with the IRS or other tax agency, do it right the first time!

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