You’ve earned a few thousand dollars trading cryptocurrencies last year and April is rig ht around the corner. After reading all about the IRS crackdown on cryptocurrencies, you’re ready to pay your fair share to Uncle Sam. But, can you still use TurboTax this year or will it be too complex?
If you have a fairly straightforward tax return, TurboTax is a great way to file your taxes without breaking the bank. The service has even introduced several new cryptocurrency features, making it easy to report common transactions and calculate your total tax asset or liability.
Let’s take a look at how to report cryptocurrencies in TurboTax.
Should You Do-It-Yourself?
IKEA’s runaway success demonstrates just how many people enjoy taking a do-it-yourself approach. But, unlike IKEA’s assembly instructions, the IRS tax code has more than 40,000 pages full of obscure tax loopholes and deductions. These deductions could save you hundreds or thousands of dollars on your taxes, but you have to know where to look for them.
For example, did you know that you can pay a fair wage to your children and deduct it from your business expenses to lower your income tax bracket? Many energy-efficient home upgrades, such as new windows or insulation, can make you eligible for a small tax credit. And, lifetime learning credits provide up to $2,000 per year toward education expenses after high school!
Accountants and tax professionals can help identify these deductions and save you money. Of course, you must determine if these potential savings outweigh the cost of tax preparation. These accountants can also reduce your risk of an audit by ensuring that you don’t cross any lines and ensure that everything is accurate on your tax return.
In general, there are several instances where you should consider hiring a tax professional:
- You make over $200,000 per year.
- You are self-employed, freelancing, or own a business.
- You have extensive investments and assets.
- You had a major life change (e.g. marriage or child).
- You don’t have the time to do your own taxes.
How to Report Cryptocurrency in TurboTax
Intuit’s TurboTax is the most popular online tax preparation software with a market share of over 60 percent. With its easy-to-use interface and integrations, the online platform is a go-to for individuals, families and many small businesses that have straightforward tax requirements — although it’s capable of handling complex taxes.
Let’s take a look at how to record two popular types of cryptocurrency transactions in TurboTax.
How to Report Cryptocurrency Trading
Cryptocurrency trading is treated similarly to stock trading — it’s considered property by the IRS. This means that you must record the cost basis and gain/loss, in U.S. dollars, for each transaction — including crypto-to-crypto transactions. This makes cryptocurrencies a little more challenging than traditional stock trades.
To report cryptocurrency trading on your taxes, you need to know the cost basis (original value) of each trade, the sale price, and the date of each trade. The resulting capital gain or loss will be taxed as either short-term (held for one year or less) or long-term (held for more than one year) capital gains or losses, which have different tax rates. Here are the steps to report cryptocurrency trading:
- Gather all relevant information: Keep track of all your cryptocurrency trades and make sure you have the date of purchase, date of sale, cost basis, and sale price for each trade.
- Determine short-term and long-term gains: Use the date of purchase and date of sale to determine if the trade is a short-term or long-term gain.
- Calculate capital gains or losses: Subtract the cost basis from the sale price to calculate the capital gain or loss.
The gains and losses are calculated on Form 8949 and Form 1040 Schedule D. In TurboTax, the transactions are entered under the Wages and Income section under Investment Income for Cryptocurrency. If you received a 1099-B from your crypto exchange, you may be able to import the data into TurboTax, else you will have to manually enter it.
Form 1040 Schedule D is automatically populated based on the data entered in the prior step, along with your non-crypto transactions and other data.
How to Report Cryptocurrency Mining
Cryptocurrency mining is considered either a hobby or self-employment income. Rather than paying capital gains tax, you must pay ordinary income tax on the income like you would any other business income. This could mean paying self-employment taxes depending on the way it’s treated.
The two options for mining income are:
- Hobby income is reported as “Other Income” on Line 21 of Form 1040. Any expenses must be reported as itemized deductions that are subject to the 2% rule.
- Self-employment income is reported on Schedule C. Expenses can be fully deducted and the net profit is subject to income and self-employment tax.
In TurboTax, hobby income is reported under the Wages and Income section under Less Common Income and then Miscellaneous Income. Self-employment income requires the Self-Employed versions of TurboTax to include Schedule C expenses, and has a wizard that works through reporting the total gains and the expenses associated with the business.
Like crypto traders, miners must pay a separate capital gains tax when exchanging the coins for fiat or another crypto currency that’s reported on Form 8949 and Schedule D.
Those earning more than a couple thousand dollars per year may also need to make estimated tax payments throughout the year. If you’re at risk of underpayment, TurboTax automatically calculates quarterly estimated tax payments and prepares Form 1040-ES vouchers that you can mail in throughout the year.
TurboTax Crypto Integrations
TurboTax provides developers with a way to integrate their software into the tax preparation process. As a user, you can use these integrations to simplify certain aspects of the tax preparation process through automatic reporting and calculation — including cryptocurrency gains and losses!
TurboTax integrates with several cryptocurrency exchanges and wallets to make reporting crypto trades and mining activity easier. The integration helps to import transaction data directly into TurboTax, so you don't have to manually enter every transaction. Some of the popular exchanges and wallets supported by TurboTax include Coinbase, Binance, Kraken, Bitstamp, and many more. Additionally, TurboTax provides helpful resources and guidance on how to report crypto income, trades, and mining activity accurately and in compliance with tax laws.
ZenLedger announced support for TurboTax earlier this year to simplify the tax reporting process across exchanges and wallets. Rather than integrating with every exchange and manually reporting your wallet transactions, ZenLedger makes it easy to handle everything in a single location and provides the data to TurboTax for tax preparation.
The process is very straightforward:
- Click on “Download TurboTax Files” on your ZenLedger account to receive a zip file. Use the .CSV file for TurboTax Online or the .TXF file for TurboTax Desktop.
- In TurboTax, navigate to Wages and Income and then the Cryptocurrency section. Select ZenLedger and click on the Continue button to integrate ZenLedger.
- Drag and Drop or select the TurboTax .CSV file from ZenLedger to import your transactions.
That’s it! Your transactions should all be imported automatically and Form 8949 and Form 1040 Schedule D will be accurate with information from all exchanges.
The Bottom Line
TurboTax makes it easier than ever to file for taxes — including many cryptocurrency transactions. Even if you’re an active trader with complex transactions across exchanges and wallets, ZenLedger’s integrations can help you ensure that you’re properly reporting everything to the IRS.