Cryptocurrencies are becoming increasingly popular with every day that passes, and it is clear that they are here to stay. Considering the sheer number of crypto traders and cryptocurrency exchanges coming up on the horizon, it is imperative to understand how to report crypto taxes.
If you are a complete beginner and find yourself dazed and confused at the thought of dealing with crypto taxes, read on to find out what cryptocurrencies are and how to report crypto taxes.
- 1 What is Cryptocurrency?
- 2 Dealing with Crypto Taxes
- 3 The IRS on Reporting Crypto Taxes
- 4 How to Report Crypto Taxes?
- 5 Crypto Trader tax tools to show you How to report Crypto Taxes
What is Cryptocurrency?
A cryptocurrency at its base is a digital medium of exchange that utilizes strong cryptographic functions to verify and, consequently, secure financial transactions. Its most noteworthy characteristic is that it operates in the absence of a central regulatory body, which is not the case with conventional fiat currencies.
Dealing with Crypto Taxes
Figuring out how to report crypto taxes has evidently become a crypto trader’s nightmare. However, you can significantly simplify the process of filing and reporting crypto taxes by using cryptocurrency tax software. Before getting into the idea of using crypto tax software, you ought to know which scenarios trigger and do not trigger a taxable event.
Under the federal law in the U.S, cryptocurrencies are taxed the same way property is. In simple words, cryptocurrency transactions are subject to capital gains, the same way property is taxed. Capital gains have to be reported on form 8949. Before that, you need to know the following:
When do you need to pay crypto taxes?
- You owe crypto taxes if you sell cryptocurrencies for fiat currencies
- You will have to pay crypto taxes if you choose to trade your cryptocurrencies for other cryptocurrencies
- You have to pay crypto taxes should you use cryptocurrencies to pay for goods and services
When do you not need to pay crypto taxes?
- Should you decide to donate your cryptocurrency to a charity or organization that is exempt from tax
- If you are transferring small amounts of your cryptocurrency as a gift, so long as they do not exceed a total of $15k
- If you decide to move your cryptocurrencies amongst your wallets
- When you purchase cryptocurrencies through your fiat currencies
- Lending your cryptocurrency to a third party
The IRS on Reporting Crypto Taxes
In July 2019, the Internal Revenue Service (IRS) sent over ten thousand letters to crypto traders who failed to report crypto taxes, where they informed them that they had to report them and file amended returns.
Failing to do so would result in penalties and possibly, imprisonment. In certain extreme cases, you are highly likely to face prison time and pay a fine of up to a staggering $250,000.
In view of the strict punishments that the IRS promises to implement, it is suggested that you learn how to report taxes if you haven’t done so yet. If you don’t know how to report crypto taxes, read on.
How to Report Crypto Taxes?
To correctly file and report your crypto transactions, you need to have the IRS form 8949 and 1040 Schedule D.
Be sure to list all your cryptocurrency transactions onto form 8949 along with the date you acquired the crypto, the date you sold or traded the crypto, your proceeds or fair market value, your cost basis, and your gain or loss.
Once you have listed each trade, total them, and transfer this amount to your 1040 Schedule D form. Be sure to include both of these forms with your yearly tax return. However, this proves to be too tedious a process to carry out, which is why you would greatly benefit from a crypto tax software.
Crypto Trader tax tools to show you How to report Crypto Taxes
The following cryptocurrency tax calculator is at your disposal if you have not been able to figure out how to report your crypto taxes.
Widely known as one of the most intuitive and comprehensive tools for crypto tax reporting, Cointracking.info boasts a variety of features and functions that includes its ability to import data from 54 trading platforms such as Cobinhood, KuCoin, and Hitbtc, among many others.
It allows crypto traders to monitor all their trades. Cointracking.info supports every cryptocurrency out there.
CryptotTrader.tax allows crypto traders to import their crypto income and trades into its program, where it will calculate gains and taxes.
CryptoTrader.tax will also prepare your tax form, which means you do not have to assume the burden of doing mind-numbing calculations.
CryptoTrader.tax works in just about any country. You can choose from a multitude of cryptocurrencies in your account settings.
Bitcoin.tax is another stellar software to use if you are yet to figure out how to report crypto taxes. This crypto tax reporting software enables the crypto trader to import your mining rewards from your wallet addresses. Here are some of its features that are worth noting –
- Imports trade history from a variety of exchanges, including Coinbase, Gemini, Circle, Poloniex, Bitstamp, Kraken, Bitfinex, CSV, etc.
- Computes capital gains
- Reports your balances and remaining cost basis accurately
A promising and intuitive crypto tax software, ZenLedger has a user-friendly interface and promises to show you how to report crypto taxes. It has a bunch of features to its credit. Some of them are –
- Supports unlimited Exchanges
- Tax Loss Harvesting
- FINCen/FBAR Alert
- Turbo Tax Integration
- Audit Report
Crypto traders can choose from a wide variety of cryptocurrency tax software for their crypto tax problems. The aforementioned tools are a few among many that can help you if you do not know how to report crypto taxes.