The April 18 tax deadline is quickly approaching, so if you haven't already, it's time to start preparing your taxes. While most W-2 income and 1099 investments are easy to account for, crypto transactions can quickly become a burden. Fortunately, some background information and access to the right tools can simplify the process.
Let's look at how crypto taxes work, what you need to know about the April deadline, and some tips to prepare and save.
How Crypto Taxes Work
The IRS classifies cryptocurrencies and other "virtual currencies" as property. As a result, you must report any cryptocurrency you receive as "income" and pay "capital gains" on any increase in value upon sale. (And no, it's not worth the risk of hoping the IRS doesn't notice your crypto income or profits – you should always report them!).
The first section you should pay close attention to on your Form 1040 tax return is the virtual currency question at the top. While you can check "no" if you've merely owned virtual currencies, you must check "yes" if you have received or exchanged/sold virtual currencies during 2022. Inaccurately answering this question can lead to problems down the road.
Then, there are a few steps to calculate your crypto taxes:
- Aggregate Transactions – The amount of tax you owe depends on your total capital gains. But, to compute your capital gains, you must have a chronological list of transactions across all your wallets and exchanges (if you use multiple).
- Complete Form 8949 – You must report each cryptocurrency sale or exchange on IRS Form 8949, including the cost basis, sale price, and capital gain or loss. Then, you add the total to determine your overall capital gain or loss for the year.
- Complete Form 1040 Schedule D – The final step is to carry over the overall capital gain or loss from Form 8949 onto Form 1040 Schedule D. Then, you can continue completing the rest of your taxes to see how much you owe or get back overall.
When completing Form 8949, you can use the default first-in, first-out (FIFO) cost basis method or match purchase and sale transactions using the specific identification method (e.g., LIFO or HIFO). For more information about these accounting methods, see our Tax Accounting Methods: How to Calculate LIFO And FIFO post.
Of course, if you receive cryptocurrency as compensation (e.g., mining), you must also report the income on Form 1040 Schedule 1 (for hobby income) or Schedule C (for business income).
ZenLedger can help simplify crypto taxes by automatically aggregating transactions across wallets and exchanges, generating a Form 8949, and populating Form 1040 with accurate data.
How & When to File Taxes
Several people complete their taxes with the help of a CPA or other tax professional. Alternatively, you can use online tax filing services like TurboTax if you have a relatively simple situation. Zenledger has tax professionals who can help with your crypto taxes or, if you choose the latter option, ZenLedger provides a TurboTax integration that makes it easy to complete your crypto taxes accurately.
The deadline to file 2022 taxes without penalties is April 18, 2023. While an automatic six-month extension is available to anyone for free, you still have to pay taxes you owe by April 18 to avoid penalties. If you fail to file your taxes or request an automatic extension, the IRS charges a Failure to File Penalty equal to 5% of your unpaid tax every month (up to 25%).
You can file Form 4868 to request an automatic six-month extension if you need more time, but you must still make an estimated payment of at least 90% of your total tax or 100%/110% of prior year tax liability (depending on income levels) to avoid Failure to Pay Penalties.
If you fail to make an adequate payment, the IRS charges a monthly Failure to Pay Penalty equal to 0.5% of unpaid taxes up to a maximum penalty of 25%. However, you can avoid paying these fees if you demonstrate reasonable cause, including paying at least 90% of your total tax due or 100%/110% of prior year tax liability (depending on income levels) by April 18 and the balance with your return.
Since the Failure to File Penalty is much greater than the Failure to Pay Penalty, it always makes sense to request an extension, even if you cannot afford to pay your taxes by April 18. And you can reduce your penalties by paying what you can afford by April 18.
The IRS does not charge any penalties if you are getting a refund.
Tax Tips for 2022 and 2023
- Don't Trust Your 1099-B – Some crypto exchanges send out 1099-B forms with your transactions and cost basis. While these figures will be accurate if you only use one exchange, you may have a very different cost basis after aggregating transactions. Exchanges and wallets cannot track digital assets cost basis once you transfer to a different wallet or exchange.
- Max Out Your IRA – The IRA contribution deadline for 2022 is April 18, 2023, meaning you still have time to maximize your self-directed IRA contributions. These last-minute contributions can help reduce your overall tax bill or eliminate future capital gains taxes.
- Harvest Tax Losses – Cryptocurrencies aren't subject to the Wash Sale Rule, making it easy to harvest your tax losses. For example, ZenLedger's tax loss harvesting tool can help you spot unrealized losses in your portfolio that you can realize to offset your taxes.
- Be Careful with DeFi – Decentralized finance, or DeFi, transactions can be tricky. In fact, the IRS has yet to address some gray areas. So, it may be worth taking a conservative approach to hiring professional help for those engaging in these transactions.
The Bottom Line
The deadline to file your 2022 taxes is quickly approaching, meaning it's time to take action to avoid any fines or penalties. By keeping the tips we've discussed in mind, you can prevent any problems and ensure that you're not overpaying or underpaying your taxes. And you can take action to save money on this year's taxes, too.
ZenLedger can help simplify taxes by automatically aggregating transactions, computing your capital gain or loss, and generating the forms you need to file. And, if you use TurboTax, there's a pre-built integration to streamline the entire process.
Get started with ZenLedger for free!
The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.