This material is intended for general information purposes only and does not constitute legal or tax advice. For legal or tax issues, the reader should consult a legal or a tax preparation professional.
Buying and selling cryptocurrencies like Bitcoin can lead to a fantastic return when the purchase and sales are done at the right time. But, for those who live in the US, this may lead to needing to pay taxes on the purchase. If there is any loss or gain during the tax year, it needs to be filed with the taxes done in the next year. Read the following guide to learn what you need to know about paying taxes on cryptocurrencies in the US, including the forms you’ll need, what steps you’ll need to take, and how it can impact your taxes.
Before reading further, it is important to remember that cryptocurrencies are handled differently in each country. The information that follows is specifically for the United States, though there may be some information like how to gather all documents that may transfer over to other countries. Additionally, those who think they may have to pay crypto taxes will want to speak with a tax professional before filing the taxes. This helps ensure crypto taxes have to be paid and minimizes the potential for any issues.
Who Has to Pay Crypto Taxes?
The IRS now has guidelines available for virtual currencies like Bitcoin. Those who do any cryptocurrency transactions during the year will need to report any gains or losses, according to the IRS. It is also required for individuals to report any cryptocurrency they have earned, even if there is no gain or loss on it when it is earned. Many platforms like xCoins.io may provide transaction histories so users can see what transactions they have done through the year and what needs to be reported, though not all will provide the correct IRS form for reporting.
Basically, all sales, conversions, payments, donations, and earned crypto will need to be reported. The IRS doesn’t count the crypto as a currency, but it does count it as property, so the same rules will apply as would apply to other types of property like collectibles that can be bought or sold and appreciate in value. Unless the crypto just sat for the entire year, not being bought or sold or anything else, it will need to be reported with the income taxes for the year.
How to Determine if Crypto Taxes are Owed
The first step individuals should take is to determine if they owe any crypto taxes and if they need to report the crypto on their taxes for the year. If they have done any transactions during the year, it’s important to go through them carefully to find out what is taxable and how much is owed for them. If the crypto was just being held for the entire year, there may not be any transactions. Otherwise, read below to find out what is taxable and how to file the taxes for the crypto transactions.
How to Know What is Taxable
Crypto is taxable if there were any transactions during the year. Some of the types of transactions that could be taxable include the following.
- Selling Crypto – This includes selling the bitcoin or other crypto and receiving cash for it.
- Conversions – Conversions include switching funds from Bitcoin to another cryptocurrency or using another cryptocurrency to obtain bitcoin.
- Purchasing Goods or Services – Anything purchased with crypto will need to be reported as it can be taxable.
- Receiving Mined Crypto – This counts as earned income, so it is taxable.
- Earning Crypto – This also counts as earned income, so it needs to be included in taxes.
- Receiving Crypto Rewards – This includes any staking rewards or interest earned from the bitcoin.
How Transactions are Reported for Cryptocurrencies
Since the bitcoin value varies throughout the year, it can sometimes be confusing to figure out how to report transactions. The IRS prefers that transactions are reported at what is considered the fair market value. This value must be measured in US dollars. Using a purchase as an example, if you buy something using crypto, the fair market value is how much that item would normally cost in US dollars.
Airdrops and How Taxes are Applied
Someone who receives free crypto through an airdrop will need to report it, same as they would if they won money in the lottery or a giveaway. Like other transactions, this should be reported with the value being the fair market value for the reward. However, there is an exception to this. If it’s sitting in the wallet but the protocol is not yet supported, meaning it can’t be touched yet, the crypto is not yet taxable. It will become taxable when the protocol is supported and the crypto can be used.
Some Crypto Events Aren’t Taxable
There are some events that are not taxable, so they don’t make a difference when filing taxes. If crypto is purchased and then held, for instance, there is no gain or loss so it wouldn’t be taxed. Transferring between wallets may also be exempt, but only if the transaction is not recorded as a disposition. If it is a disposition, it will be taxable. Another event that is not taxable includes donating crypto to a qualified charity or non-profit organization. The recipient needs to be a qualified tax-exempt company for this to apply.
What to Gather Before Filing
If there are any crypto transactions to report, the first thing to gather is a transaction record of all the transactions done during the year. For the taxes filed in the next year, that would mean gathering all transactions from January 1 to December 31 of the tax year. It is important to create a list of all transactions, even if they may not be taxable now.
Gifts, for instance, may not be taxable if the crypto is just being held. By having them in the list, it gives the individual a more complete overview of what happened during the year and allows them to check to see if there are any taxable events they might not have thought of. When creating a list of all transactions, also pay attention to any fees that might have been paid, as this could need to be included with the taxes as well.
Calculate the Gains and Losses
Once the individual has a complete record of their transactions on hand, it’s necessary to figure out the gains or losses for each one. This means going through each transaction to determine the cost basis. With cryptocurrencies, losses can be used to offset any of the capital gains that the individual might have. This is not typically done for property but can apply with Bitcoin and other cryptocurrencies. Calculations for this is done by determining the basis for the crypto that was sold, then subtract that from the net proceeds. This can get a little more complicated when fees are involved, but it is necessary to do this step carefully to avoid any mistakes.
Be Wary When Using Calculators
There are online calculators that can be used to help determine gains and losses, but it is important to be wary when using them. While they can give individuals a better idea of what to expect for gains and losses, they may not be completely accurate. If a calculator is exchange-specific, for instance, it won’t offer a complete picture of gains and losses because it doesn’t include anything done on a different exchange. It also won’t be right for specific circumstances, such as when the individual changes their method for reporting from a previous year.
Choose the Right Method for Reporting
There are different methods of reporting that can be used, based on the individual’s preferences as well as guidelines from the IRS. This generally comes into play if a lot of the crypto is purchased and only some of it is later sold. For most individuals, the methods for reporting can be first-in-first-out, last-in-last-out, or Specific Identification, depending on what works best for them. This is done similarly to how stocks would be handled by the IRS, and the right one to use can vary. However, it is best to stick with the same one year over year as it is easier to calculate gains and losses between years or over longer periods of time when the same accounting method is used.
Gather IRS Forms Needed for Filing
After calculating gains and losses using the preferred method of reporting, it’s time to start filling out the IRS tax forms. There are a number of tax forms that may be applicable depending on the individual’s situation, and not all individuals will need to use all forms. The two most common forms needed are 8949, which includes a list of all transactions from any exchanges used, and 1099-K, which is a list of all transactions and is received when there is more than $20,000 in gross proceeds during one year or when there are more than 200 transactions in a year. Those who are filing US taxes but who are not living in the US may need other forms, depending on their situation.
Fill Out Forms Carefully
After gathering all transactions and forms, it’s time to fill them out carefully. It is important to ensure there are no mistakes on the forms used, as that could cause problems with the taxes being accepted by the IRS or, if the mistake is not noticed until later, with taxes for the next year. After checking to ensure the forms are filled out accurately, the individual is ready to file their taxes. Still, it’s a good idea to consider whether there needs to be amendments for prior years or consult a tax professional to ensure everything is correct.
Consider Amendments for Prior Years
Those who dabbled in crypto but didn’t file anything with their taxes the previous year may want to look into an amendment while they’re doing the current year’s taxes. Any individuals who failed to report their income last year or who may have made a mistake when reporting their transactions have been encouraged to file an amendment. It’s often easy to do this when the individual is already going through their transactions or is working with a tax professional on the current year’s taxes. A failure to amend a prior year's mistakes could lead to an audit or other issues for the taxpayer.
Consult a Tax Professional and File
It can be incredibly daunting to go through all transactions and figure out what’s taxable, what’s not, how much the capital gains or losses were, and more. However, help is available. Though this guide includes the information an individual needs to handle crypto with regard to their taxes, it is still a good idea to consult with a tax professional who has experience working with cryptocurrencies. This way, the individual can minimize the potential for any mistakes and have assistance with not only this year’s taxes but amendments for prior years if needed.
Tips for Preparing for Next Year
For those who are new to crypto, tax time can be a bit stressful as they may not have all of their transactions listed in one place and will need to do some digging to find everything. However, it’s a great time to start preparing for next year so this won’t be an issue. Once the individual sees what they need to keep records of, it’s a good idea to start organizing the information for the crypto. When it’s time to do the next year’s taxes, they’ll have everything they need in one record and this could make filing taxes a lot easier.
Cryptocurrencies like Bitcoin do need to be included in taxes, with some exemptions. If you have used crypto in the prior year, unless it falls under an exemption, it is crucial to start going through all transactions and determining how to file taxes properly. Use the steps here for a basic guide to find all transactions, determine the gains and losses, and fill out the appropriate forms. This will enable you to minimize the potential for mistakes and ensure the crypto transactions are all properly filed with your taxes so you don’t have to worry about an audit or other issues.