Before a cost basis can be determined, all cryptocurrency transactions need to be calculated back to USD.
While that may sound complicated, the good news is that software that can keep track of cryptocurrency transactions has gotten better. That makes preparing cryptocurrency transactions for your tax return a little easier. In this article, we’ll go over what you need to know about cryptocurrency transactions taxes
Cryptocurrency Involvement Must Be Reported
Back in the day, people used to be able to avoid reporting their cryptocurrency transactions and get away with it. It was early days and the IRS wasn’t sure how to treat or collect taxes on cryptocurrencies.
Times have certainly changed. There’s no way to avoid reporting cryptocurrency transactions today. Now 1040 tax returns make it difficult to not see the writing right at the top of the return:
At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
Now there’s no excuse for not reporting your cryptocurrency transactions. But which transactions exactly? Basically, any involvement that you’ve had with cryptocurrency must be reported. This includes:
- Buying
- Selling
- Exchanging
- Received as a gift
- Gave as a gift
- Used as barter for non-cryptocurrency asset
It really doesn’t matter what the transaction was. If you somehow (virtually) touched cryptocurrency, you need to report it.
Different Types Of Cryptocurrency Transactions
A cryptocurrency transaction that can trigger a tax event will affect your cost basis and your overall gain or loss. The following transactions will trigger a tax event:
- Selling cryptocurrencies and receiving USD in return
- Earning cryptocurrencies (such as through lending)
- Exchanging one cryptocurrency for a different cryptocurrency
- Using cryptocurrencies to buy or sell goods
Cryptocurrencies Transactions Are Still Difficult To Track
Part of reporting cryptocurrency transactions is knowing your cost basis. You need to know if you had a gain or a loss for the year. That’s only determined by keeping track of all your buy and sell transactions.
This means either you’re keeping track of it or an exchange is. Most cryptocurrency exchanges will have a log of your transactions but not all will calculate your cost basis.
If you're day trading cryptocurrencies, manually entering in each transaction will be a lot of work. Also, if you use multiple exchanges, the problem is compounded.
Tax Tools For Cryptocurrency Traders
Given that reporting cryptocurrency transactions is required by the IRS, using an exchange that has great tax-related export features will make it easier to report come tax time. Many exchanges will send out a Form 1099-K, which has gross amounts for cryptocurrencies.
Some of the most popular exchanges may even offer tax software integrations. For example, Coinbase customers are able to easily import their transactions right into TurboTax.
There is also third-party software available that can keep track of individual transactions on stocks, options, and even cryptocurrencies. Below are some apps that can help you keep track of your cryptocurrency transactions:
- Cryptotrader.tax
- Cointracker
- Tradelog
- Bitcoin.tax
It should be noted that if you’re a TurboTax customer, you may want to use Cryptotrader.tax as the two companies recently announced a partnership.
Depending on the information being reported, it may be worth hiring a tax advisor for help in determining your cost basis and ensuring that everything is reported correctly on your tax return. H&R Block, for example, offers cryptocurrency investors special consultations with local tax pros to help them properly report their gains and losses.
How To Pay Taxes On Cryptocurrencies
Cryptocurrency transactions fall into two categories — capital gains and ordinary income. Capital gains are your investing activity. This is what most cryptocurrency traders are involved in. Ordinary income activities are not trade-related — the following breaks down the different activities involved in each category.
Capital gains (i.e., investing):
- Buying
- Selling
- Trading
Ordinary income:
- Mining
- Earning rewards in exchange for staking coins
- Interest on lending
Your exchange will typically report transactions on a 1099-MISC (such as through lending), a 1099-K (for transactions), or a 1099-B (for selling/exchanging).
Form 8949 is where cryptocurrency investment transactions are reported. This is the same form used for reporting stocks and other equity transactions. Cryptocurrencies are treated as property for tax purposes. This brings them more into alignment with equities.
For gains on holdings of more than a year, they’ll be treated as long-term gains, which are taxed at a lower rate than ordinary income. Long-term rates range from 0%, 15%, to 20%, depending on your income level.
Related: Capital Gains Tax Brackets
Final Thoughts
As you can see, there's a lot that goes into paying taxes on cryptocurrencies. You may be a do-it-your-selfer and are comfortable using transaction software to determine your cost basis, and file your return. Otherwise, you might want to hire a tax advisor such as H&R Block or even someone local to help you through the entire process.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.