Cryptocurrency or “crypto” is a digital form of exchange, not a physical currency. In this form of exchange, values and transactions are stored online in databases that use strong cryptography to secure transaction records, verify the transfers of ownership, and control the creation of additional crypto. The records are maintained by a decentralized system instead of by centralized authorities.
The idea of cryptocurrency has been around for many years, but the concept became reality in 2009 with the launch of Bitcoin. Since then, many other cryptocurrencies have been developed. Today, more than 21 million adults in the U.S. own digital crypto assets. Some for international trade, some for speculative investing, and some for the ease of digital spending.
Even though cryptocurrency is a digital asset, it still comes under the watchful eye of the IRS and must be reported. So, it is key for all tax filers to know their tax responsibilities for cryptocurrency.
Do You Need to Report Cryptocurrency on Your Income Taxes?
This is a definite “yes.” Cryptocurrency is considered as an investment so the tax responsibilities for cryptocurrency, like any other investment, include reporting any gains or losses on crypto transactions. If you don’t report crypto activities on your taxes, you risk being audited by the IRS.
How Should You Report Cryptocurrency on Your Taxes?
Because cryptocurrency is still fairly new, tax obligations may seem a bit daunting. However, know that tax responsibilities for cryptocurrency are similar to those required for other types of investing.
Here are some basic principles to follow:
First, most crypto activity is taxed as property. That means that capital gains or losses for the following activities are reported for selling your crypto for cash, trading one type of cryptocurrency for another, and using crypto for merchant payments.
Second, crypto can be earned as income by receiving airdropped tokens, staking, or mining crypto, or getting paid in crypto.
Third, not all crypto activities are taxable. If you have bought crypto but haven’t disposed of it, you don’t have any taxable activities to report. That includes buying cryptocurrency, gifting cryptocurrency, or donating cryptocurrency (although this is tax-deductible.)
Fourth, tax rates on crypto depend on your holding period. Holding crypto for less than one year will be taxed as a short-term capital gain. Holding the asset for longer than one year will be taxed at the lower long-term capital gains tax rate.
Fifth, any capital losses on trades or sales of the cryptocurrency can be used to minimize your tax liability.
Follow these steps to fulfill your tax responsibilities for cryptocurrency:
- Assemble a complete list of your crypto transactions and exchanges including any 1099 forms received from exchanges.
- Calculate the value of your capital gains or losses by subtracting the price you bought the crypto at from the price you sold it at.
- Transfer the capital gains or losses onto IRS Form 8949.
- Transfer totals from IRS Form 8949 to Form 1040 Schedule D.
- Complete any remaining cryptocurrency income of Form 1040.
You can ease the burdens of the tax responsibilities for cryptocurrency, avoid errors, and perhaps even get a refund by seeking the professional assistance of a CPA.
Get Expert Tax, Accounting, and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting, financial assistance, and tax preparation that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.