Reporting Cryptocurrency on Your Tax Return

The IRS treats cryptocurrencies like bitcoin as property for tax purposes. This means any crypto transactions may be taxable events that you are required to report on your annual tax return. Properly accounting for crypto activity protects you from penalties and ensures you pay only what is owed.

Tax Implications of Cryptocurrency Transactions

Whenever you sell, trade, or otherwise dispose of your cryptocurrency, it triggers a taxable event:

Trading Crypto for Fiat Currency

Selling crypto for government-issued currency like dollars is a taxable event. You must report capital gains or losses.

Trading Crypto for Other Assets

Exchanging one cryptocurrency for another, or using crypto to purchase goods and services also qualifies as a sale and is taxable.

Earning Crypto as Income

Getting paid for services in crypto, mining activities, staking rewards, and interest account for earned income.

Converting to Stablecoins

Even trading a volatile coin for a stablecoin pegged to the U.S. dollar is considered a sale of the original crypto.

Any disposition of crypto assets could potentially incur taxes.

Calculating Cryptocurrency Gains and Losses

To ascertain taxable gains or losses, you must determine your cost basis – the original value of the crypto when acquired.

Acquired by Purchase

Your cost basis is the actual purchase price, including any fees and commissions paid.

Acquired by Mining/Staking

Your basis is the fair market value of the crypto on the date it was successfully awarded to you.

Acquired by Gift/Inheritance

The donor’s original basis carries over to you as the recipient.

Acquired by Airdrop

These “free” cryptos have a basis of $0 if totally unsolicited.

With basis established, you then calculate gain or loss compared to the crypto’s value when sold or exchanged.

((Sale Price) – (Cost Basis)) = Capital Gain or Loss

Tax Forms for Reporting Crypto

You must report crypto transactions on the following IRS forms:

Form 1040 Schedule D

Capital gains and losses from selling crypto assets held as investments are declared on Schedule D.

Form 8949

Itemizes each transaction with dates acquired and sold, proceeds, basis, and gain/loss. Attached to Schedule D.

Form 1099-B

Cryptocurrency exchanges issue this to users who sold, exchanged or otherwise disposed of $20,000+ in crypto during the tax year.

Form 1099-K

Third-party settlement organizations provide this form if you received at least $600 in gross crypto sales proceeds.

Form 1040 Schedule 1

Records additional income like crypto mining and staking rewards.

Thorough record-keeping all year makes filing these forms easier.

Record-Keeping Tips for Crypto Taxes

Robust record-keeping helps verify your tax reporting and avoid issues:

Save receipts showing purchase dates, cost basis, and fair market value on acquisition dates.
Note dates and details for every crypto-related transaction throughout the year.
Retain records for airdrops, forks, mining, and staking activities.
Maintain thorough account records from each exchange and wallet.
Download monthly statements showing year-to-date activity.
Keep records of crypto received as income or gifts.
Precisely track conversions between coins and to/from fiat currency.
Confirm forms received from exchanges for amounts over reporting thresholds.

Organized documentation supports basis calculations and reconciling account records with tax forms.

Avoiding Cryptocurrency Tax Pitfalls

Steer clear of common crypto tax mistakes:

Failure to Report

All crypto transactions even if not in fiat currency must be reported. Omissions can trigger audits and penalties.

Inaccurate Basis

Without documentation, reconstructing cost basis for gains and losses is difficult, risky, and could be considered misreporting.

Lost Records from Exchanges

If the exchange you used shuts down, records could be lost. Maintain your own transaction history.

Conflicting Trade Data

Discrepancies between your records and official tax forms require reconciliation before filing.

No Estimated Tax Payments

Owing a large, unexpected tax bill from crypto gains. Make quarterly estimated payments to avoid underpayment penalties.

Tax evasion Schemes

Avoid “crypto tax elimination” pitches; unrealized gains and like-kind exchange exclusions are largely inapplicable.

Do your due diligence to ensure accurate, supportable reporting of all cryptocurrency activity on your tax return. Consult a crypto-savvy tax professional to avoid missteps. With proper planning, you can feel confident you are meeting all tax obligations on these assets.