As you trade across exchanges and wallets, it is really hard to keepyour crypto taxes and accounting accurate. We show you exactly how to report cryptocurrency on taxes withthis step-by-step guide.
Do I have to pay taxes on my crypto to crypto trades?
Yes, according to the IRS, you have to report, file, and pay capitalgains and income tax on cryptocurrency as a virtual currency. Crypto to cryptotrades is a taxable event. Many people mistakenly believe that you are onlytaxed when you sell your crypto for cash- but that is false. When you sell yourcrypto out to cash (US Dollars, Euro, Yen, etc) that is a taxable event.
Also note that in US tax law, when you purchase crypto with cash -that is not a taxable event. You have already been taxed to acquire that cashin some way.
A trade from one crypto to another (BTC to ETH) is a taxable event.Investing in an ICO (selling ETH to purchase XYZ) is a taxable event. Incomefrom mining, staking, airdrops, and forks are a taxable event. When you havelosses, this reduces your tax burden. You can write off losses when you losecoins or get hacked. You can also claim capital losses on your trading, this iscalled Tax Loss Harvesting.
Do I have to pay crypto income taxes on Stablecoins?
Stablecoins are not recognized by a tax authority as foreign currency.Your trade from a cryptocurrency to a stablecoin is the purchase ofcryptocurrency and a taxable event. Stablecoins are treated just like BTC orETH when considering your taxes. The sale of stablecoins to cash is alsoconsidered a taxable event- but usually without very large tax implications.
Do I have to pay taxes on income from crypto mining, staking,forks, or airdrops?
Often when you receive new crypto from interest payments, mining,staking, forks, or airdrops- this is considered income. You receive income atmarket value at the time of receipt of the coin and then you would pay anycapital gains and losses depending on how long you hold the crypto beforeselling for another coin or cash.
Also, when you send crypto between accounts you own - for example fromyour Coinbase account to your Ledger wallet- this is not a taxable event. This is called a Self Transfer.
● What You Need to KnowAbout Crypto Mining Taxes
● What Are Hard Forks AndHow Do They Impact Taxes
Do I Have to Pay Taxes on Lost or Stolen Crypto?
If you lose or have your crypto stolen, you may be able to claim aloss on your tax return. However, whether or not you can claim a loss and howit will be treated for tax purposes depends on a number of factors, includingthe specific circumstances of the loss and the tax laws in your country.
In the United States, for example, losses resulting from theft orcasualty (such as a fire or natural disaster) are generally deductible aspersonal losses if you itemize your deductions on your tax return. However,there are limits on how much of a loss you can claim, and the loss must bereported to the authorities in order to be deductible.
On the other hand, if you simply lose access to your crypto due to aforgotten password or a lost private key, you may not be able to claim a lossfor tax purposes. In this case, the crypto may be treated as abandoned propertyand may be subject to unclaimed property laws.
It'simportant to note that the tax treatment of crypto losses can be complex andcan vary depending on the specific circumstances and the laws in yourjurisdiction. If you have lost or had your crypto stolen, it's a good idea toconsult with a tax professional or financial advisor to determine how to besthandle the situation for tax purposes.
What are the IRS Crypto Tax Forms?
The Internal Revenue Service (IRS) has specific forms that taxpayersmust use to report their crypto transactions for tax purposes.
For individuals, the most relevant form is likely to be Form 8949,which is used to report capital gains and losses from the sale or exchange ofcapital assets, including cryptocurrency. Form 8949 requires taxpayers toreport their crypto transactions in detail, including the date of thetransaction, the type and amount of crypto involved, and the fair market valueof the crypto at the time of the transaction.
In addition to Form 8949, individuals may also need to report theircrypto transactions on Form 1040, which is the primary tax return form forindividuals in the United States. This may be necessary if you have substantialcrypto transactions that need to be reported or if you have other income thatneeds to be reported on your tax return.
For businesses, the most relevant form is likely to be Form 4797,which is used to report the sale or other disposition of business property,including cryptocurrency. Form 4797 requires businesses to report their cryptotransactions in detail, including the date of the transaction, the type andamount of crypto involved, and the fair market value of the crypto at the timeof the transaction.
How ToReport Crypto Taxes: 5 Steps
Step 1: Gather your Crypto Trading Information
The first step to reporting crypto income taxes is to get all of your transactions andtrading history together. The easiest answer to how to report crypto on taxes(and really the only accurate way taking into account how many transactions,wallets, and exchanges you might have) is to use crypto tax software.
With ZenLedger you can use API connections to connect to your wallets.ZenLedger as a crypto tax software can talk to many exchanges includingCoinbase, Coinbase PRO (GDAX), Binance, Gemini, BitMex, Kucoin, and many othersexchanges. This allows for a very fast import of your transaction history andvery accurate accounting.
We have step-by-step instructions for you to make this as easy aspossible. This also means loading all of your wallet activity. This is so oursystem can see all of your non-taxable self-transfers and your trading fees-which means that you won’t overpay when you file your taxes. We can also loadin transactions using simple spreadsheets, called CVS. You can create themyourself or download them from exchanges and wallets.
Step 2: Make Accounting Adjustments
The next step on how to reportcryptocurrency on taxes is to review your crypto transactions and makeadjustments. You may see a transaction that has not been marked as aself-transfer. Or you may want to claim some coins as lost because they werelost in an ICO or when an exchange shut down.We offer accountants and savvytraders the ability to optimize their tax returns through manual adjustments.
Step 3: Pick an Accounting Method
When investors sell multiple capital assets with differing basis, theycan either choose to sell the crypto they’ve held the longest first (first-in,first-out - FIFO), or sell the newest ones first (last-in, first-out - LIFO).In theory, you can choose which method you would like to apply, however, manyin the crypto-tax industry believe FIFO is the only appropriate treatment unlessyou can specifically identify which coin you are selling. Contact a taxprofessional if you have further questions.
ZenLedger’s cryptocurrency tax calculator allows you to easily see theimplications of applying either strategy, so you can pick the one that worksfor you.
Step 4: Calculate the Crypto Cost Basis
The cost basis of an asset is its cost to you (the amount you paid forit). Note this includes transaction costs, meaning exchange fees should beincluded when determining the basis.
Bitcoin as Income: The Concept of Fair Market Value
The basis of a cryptocurrency received as income is a bit different.Since you didn’t actually pay anything, the initial basis is 0, however, youmust declare the USD value of the amount received as ordinary income. Forexample, if you earned some bitcoins consulting, and at the time you were paidthe BTC was worth $4,000, that is your basis. Thus, your basis incryptocurrency that was received (and reported) as income is the Fair Market Value (FMV) when you were paid.
Bitcoin Income As gifts or Inheritance
Gift recipients receive the gifter's basis, so if a recipient receivesa batch of crypto that was purchased for $1, and sells for $7,000 upon receipt,the recipient has a $6,999 gain per coin (which would likely be a capitalgain). For inheritances, the recipient can elect to have a “step-up” in basisto the FMV at the time of inheritance, rather than the decedent’s purchaseprice.
● Tracking Cost BasisAcross Wallets & Exchanges
Step5: File your Crypto Taxes
In order to properly file and complete your crypto taxes, you need toknow about several IRS forms.
The most popular forms are IRS form 8949 and 1040 Schedule D. In Form 8949 (see the picture here below)you should include all trades and sells off your crypto along with the datewhen you acquired this crypto, the date when you sold it, your proceeds (FairMarket Value), cost basis and your gain or loss,
Firstly, you should list all trades you had in this tax year, andafter that, you have to include the total amount at the bottom, and thentransfer this amount to your form 1040 Schedule D (see the picture below).
Both IRS form 8949 and 1040 Schedule D must be filed with your annualtax returns.
SubmittingCrypto Taxes On Income Earned As A Result Of Crypto Mining
If you mine cryptocurrency as a hobby, you will also need Form 1040 Schedule 1. You will have to include the value of thecoins that you earned as a result of the mining as “other income” on line 21 ofthis form.
If you file it this way, it limits your ability to sign off yourexpenses associated with mining, since your expenses will be subject to the 2%rule.
However, if you own a business entity to run your mining activities,you will report your capital gain or loss using ScheduleC. If you do it this way, you can fully deduct your expenses related toyour business. The net profit from your business is subject to income tax.
How To Report Cryptocurrency On Taxes: Foreign Crypto Exchange Tax Reporting
Do you own $10k worth of cryptocurrency in one of the most popularforeign exchanges? Binance (Malta), Kucoin (Singapore), Bitfinex (Hong Kong,China), Jaxx (Canada), and Huobi (Korea) are widely used crypto investors inthe US and abroad. If you do have (or had through the course of the year)$10,000 USD or more, you need to report that to the US Government.
According to the so-called “The Paul Manifort Rule,” holding over$10,000 USD in a foreign account or accounts at any point during the taxableyear triggers a requirement to file Form 114 – Report of Foreign Bank andFinancial Accounts (FBAR) with the Financial Crimes Enforcement Network(FinCEN). Note that although the filing deadline is the same as the tax return,the FBAR filing is not part of the tax return and is filed separately/directlywith FinCEN.
For crypto traders, this means that if your holdings at a non-US-basedexchange exceeded $10,000 at any given point of the year, you will need to fileForm 114 with FinCEN. Further, if you have two foreign exchangeaccounts that each had a maximum of $5,001, then you still need to file anFBAR, since the aggregate is over $10,000.
FilingCrypto Taxes: Taxes On Crypto Held In A Financial exchange, Crypto BankAccount, Crypto Managed Fund
On top of that, if you hold your cryptocurrency on a FinancialExchange, in a Crypto Bank Account, or you invested in a Crypto Managed Fund,you may have to file a Form 8938. Thisform is related to the Foreign Account Tax Compliance Act (FATCA). This act wasmeant to facilitate financial reporting between the US and more than 110 othercountries and over 300,000 Foreign Financial Institutions.
Read more about FATCA and its requirements for US taxpayers.
Crypto Tax Extension: How To File For A CryptoTax Extension?
If youhave run out of time and do not think you can file your tax forms by April15th, you can file a 6-month extension to get your returns in order. Somepeople only need 15 minutes to get their taxes down by our software, but somepeople have very complicated transactions and need more time. Once you file theextension request to the IRS, you will have until Oct 15th to file your taxreturn.
It’simportant to note that filing an extension does not mean you don’t have to paythe taxes you owe on April 15th. An extension gives you more time to do youraccounting and paperwork for the previous year. However, you still have to payan estimate of what you think you owe on April 15th, even if you filed an extension.Here are the IRS penalties for not filing or not paying what you owe. Ifyou have questions here, consult an accountant or tax professional.
Youcan use the ZenLedger.io crypto tax tool now for free to help you file yourtaxes or your extension (IRS tax extension). Here’s the process:
● Either by hand or using a tax tool such as ZenLedger, youor your tax professional will need to figure out the capital gains/losses foryour crypto trades across all exchanges and wallets you used. Put this numberinto your total capital gains as you consider your other financial assets suchas stocks and bonds.
● Send the IRS a check for the estimated amountbefore April 15th.
● Fill out Form 4868online or mail in a paper copy with a registered postmarked date before April15th….just to be safe.
How ZenLedger Can Help You File Your CryptoTaxes
Grand Unified Accounting Report
Thisunique report provides accounting transparency on how to calculate yourcryptocurrency taxes. You don’t have to wonder about how to file Crypto Taxesand Accounting, ZenLedger does it all for you automatically.
Superior Customer Support
With the ongoing IRS campaign to enforcecrypto tax control, it’s very important that you file your Crypto Taxesaccurately. You don’t want to be caught unprepared or end up owing more taxesthan you were expecting.
ZenLedger’scustomer support can help you with more than just navigating our software.While we don’t give tax advice (you need to speak to your CPA or taxprofessional for that) we do know how to report Crypto Taxes and we have taxprofessional partners to ensure our solution keeps your taxes accurate. Thatmeans we can help you save money on your taxes by providing tools to harvest atax asset on coins when you’ve lost money or explaining the basics of how andwhy Crypto Taxes function the way they do.
We arealso here to help you get the data out of your exchanges and wallets. With over300+ integrations, we know how to get your data out, formatted, and easilyuploaded. We have more than 70 support articles published and chat supportavailable online during business hours to answer any questions you have.
The Bottom Line
Nowthat you know everything about how to report cryptocurrency on taxes, youprobably don’t want to go through this process alone. We are here to help you!Sign up for ZenLedger todayin order to see your tax estimate for free and stay compliant!
Read also - How to Make Money with Cryptocurrency