It’s been more than a decade since cryptocurrencies like Bitcoin were introduced. However, the tax policies relating to cryptocurrencies still remain unclear.
This rise in popularity is now causing governments to pay closer attention to these crypto assets. According to official IRS guidance, Bitcoin and all other types of cryptocurrency should be treated as property for tax purposes .
Keeping this in mind, cryptocurrency will be treated like property such as stocks, gold or real estate. It is now mandatory to report your capital gains and losses from all your crypto trades when filing your taxes.
If you fail to do so, you will be liable for tax fraud and the IRS will impose a hefty fine.
What are the Taxable Events for Cryptocurrency?
A taxable event is an action that causes a tax reporting liability. When this event occurs, a capital gain or capital loss is triggered which is required to be reported on your tax returns. When going about how to file crypto taxes, check to see if these events have occured.
- Trading cryptocurrency to fiat currency (USD).
- Trading one cryptocurrency for another type of cryptocurrency.
- Using cryptocurrency to pay for goods and services.
- Earning cryptocurrency as a form of income (mining).
What are the Non-Taxable Events for Cryptocurrency?
The following events listed below are not taxable when going about how to file crypto taxes.
- Giving or receiving cryptocurrency as a gift is a non-taxable event.
- Transferring cryptocurrency between different crypto exchanges and digital wallets (without triggering capital gains and losses).
- Purchasing cryptocurrency with fiat currency like USD (No gains are realized until the cryptocurrency is traded, used, or sold).
How to Calculate Crypto Capital Gains and Losses?
Step 1: Determine Your Cost Basis
The most important aspect to understand is when going about how to file crypto taxes is how to determine the cost basis of your holdings. The cost basis is the money which was used to purchase your property.
In the case of crypto assets, the purchase price along with the other costs associated with the cryptocurrency such as transaction fees and brokerage commissions from the crypto exchanges you originally purchased cryptocurrency from.
(Purchase Price of Crypto + Other fees) / Quantity of Holding = Cost Basis
Step 2: Subtract Cost Basis from Fair Market Value
The next step is to subtract the cost basis on the sale price of your cryptocurrency. Sale price is also known as the Fair Market Value. When going about how to file crypto taxes, use the equation below to calculate your capital gain or loss.
Fair Market Value – Cost Basis = Capital Gain/Loss
What if Money was Lost when Trading Cryptocurrency?
If you incurred more capital losses rather than capital gains when trading your cryptocurrency. You can go ahead and file these losses as part of your tax returns. Many crypto investors strategically sell their crypto assets which incur losses to reduce their tax liability. This approach is commonly referred to as Tax Loss Harvesting.
How to Accurately Determine the Fair Market Value?
The concept of Fair Market Value poses a variety of problems for crypto traders. Many crypto traders have been dealing with cryptocurrency for years without keeping track of the Fair Market Value at the time of trading.
When going about how to file crypto taxes, the Fair Market Value is necessary for crypto traders
to file their taxes accurately. Depending on the number of trades carried out, the process of calculating capital gains can be extremely time consuming and can get out of hand if the trader has not kept track.
This problem seems to be increasing among crypto traders which is why many of them have started using crypto tax softwares which can automate the entire crypto tax reporting process.
When looking for easier ways of how to file crypto taxes, try using a crypto tax software as they can speed up the calculating process and provide accurate information on how much tax you are liable for.
What is the Process of a Crypto Tax Software?
Most crypto tax softwares use a similar process of how to file crypto taxes. These crypto tax softwares import your trading information relating to all details of the cryptocurrencies you have sold or purchased from the supported exchanges and the donations you have received as well as the crypto obtained from activities such as crypto mining.
The trader will be given the option of which accounting method they prefer to use such as First In, First Out (FIFO), Last In, First Out (LIFO), average costing and like-kind treatment. They can also compare all the methods and stick with the one that suits their needs.
This will be followed by a capital gains report which will detail the cost basis of each transaction, sale proceeds and gain, an income report with all the values mined, donation report with cost basis information and a closing report with the net profit and loss automatically calculated.
From here, the trader can attach the report as a statement on their tax returns when going about how to file crypto taxes.
Zenledger is a crypto tax calculator that is known to support all major exchanges and cryptocurrencies. It has the option to automatically fill various tax forms such as Schedule D, 8949, FBAR and FinCen114. Zenledger is 100% IRS compliant and will generate profit and loss statements for you and your Certified Public Accountant (CPA), if required.
Cointracker is a hybrid crypto asset tracker as well as a crypto tax reporting software. They
have a simplistic interface that visually displays all the crypto assets you own and the trading history associated with it.
When going about how to file crypto taxes, CoinTracker also comes with additional software tools such as a performance tracker which statistically displays a clear picture of your crypto investment and its performance over time.