Cryptocurrency has garnered a lot of attention as its value has risen exponentially over the past few years, but many people don’t realize that the IRS considers cryptocurrencies subject to capital gains taxes. The fact that so many cryptocurrency transactions are done anonymously also means that people aren’t reporting their gains to the IRS. If you’ve made significant profits by trading in cryptocurrency, it’s important to understand how to report these profits to the IRS and pay your taxes appropriately, or else face stiff penalties and interest charges down the line. Here’s how to report cryptocurrency gains to the IRS. How to Report Cryptocurrency Gains to the IRS
The Cost Basis Of Cryptocurrencies
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What Is It And How Do You Calculate It? A cryptocurrency’s cost basis is made up of its purchase price. That means if you bought a single bitcoin for $100 USD, your cost basis would be $100. If you later sold that bitcoin for $200 USD, your capital gain (or loss) would be calculated as ($200 – $100) * 1 BTC = 0.5 BTC. If you had instead purchased 10 bitcoins at once for a total of $1,000 USD, then each coin’s cost basis would be ($1,000 / 10) * 1 BTC = 0.1 BTC and so on and so forth until all coins have been accounted for.
Reporting Cost Basis And Capital Gains To The IRS
Your gains and losses are calculated as either short-term or long-term. These terms apply to how long you’ve held an asset, not its physical location. A gain is a profit you make from selling something for more than you paid for it. A loss is a loss made by selling something for less than you paid for it.
Examples Of Cost Basis Accounting For Crypto Currency
The cost basis of your crypto currency is based on how much you paid for it. The cost basis is used by regulators and investors alike in determining taxable income from cryptocurrency trading. If your crypto coin has gone up in value, you can use that as a capital gain which is not subject to taxation. If, however, your coin has decreased in value then it’s treated as income subject to taxation. How does that work?
Some Cases Where Tracking Cost Basis Is Tricky Or Difficult
You might be confused about how to report your cryptocurrency gains, especially if you receive airdrops (or fork drops) of free coins. In cases like these, it’s often necessary to determine your cost basis in a more indirect way.
Using Accounting Software
What if your crypto trading has made you some serious income? Can you claim it on your taxes? Absolutely. While there isn’t a hard-and-fast rule when it comes to cryptocurrency and taxes, an accountant should be able to help you determine which of these gains is taxable—and even how long those gains need to be reported on tax forms.
What If I Bought And Sold Different Currencies?
Despite these similarities, crypto and fiat currencies are treated differently for tax purposes. The Internal Revenue Service (IRS) classifies them as property—not currency—which means they’re taxable in different ways: If you buy and sell one type of cryptocurrency, say bitcoin, for another, such as ether, you have a taxable event. The same is true if you exchange bitcoin for cash or buy goods with it.
What If I Bought And Sold At Different Times?
The rules for calculating your taxable gain on cryptocurrency transactions depend on whether you bought and sold at different times. Here’s how it works: Say you bought 10 Bitcoins at $10,000 in 2017, and then sold them at $20,000 in 2018.
Further Reading and Research
The IRS has not issued comprehensive guidance on taxation of cryptocurrency. In Notice 2014-21, they detailed how virtual currency would be treated for tax purposes. The notice was released before many bitcoin startups had gone mainstream and gained large valuations.
How much crypto do you have to report on taxes?
Depending on how much crypto you have, you might need to report it. The good news is that, at least for now, reporting requirements aren’t too complicated. Generally speaking, if you made money off of cryptocurrency in 2017—whether in BTC or an altcoin like ETH—you have to report those gains on your taxes.
How do I report crypto taxes without a 1099?
Let’s say you sold $1,000 of bitcoin in 2017. That $1,000 of income likely isn’t going to show up on a 1099 or other tax form that you receive from your exchange. You are required by law to report any income that exceeds $600 in any given year (for 2017) but exchanges typically don’t report sales for less than that amount.
Do I need to report cryptocurrency?
It depends. The IRS treats cryptocurrency as property, meaning it’s subject to all of its associated tax rules. Any time you buy or sell a cryptocurrency for fiat currency, for example, you have a taxable event. This means that any time you cash out of crypto—whether you’re trading it for another digital coin or turning it into dollars—you need to declare your gains and losses on your taxes.
Do you get a 1099 for cryptocurrency?
The first thing you need to know is whether or not you get a 1099 for cryptocurrency. If you held your cryptocurrency as a trade, any profit that exceeds $600 needs to be reported on your tax return. That’s more complicated than it sounds, however. Because cryptocurrencies have fallen in value considerably since they were bought (and likely sold) that $10,000 purchase made at $5,000 could have only netted a gain of $1,000 or less.
Do I pay tax on crypto if I don’t sell?
If you’re holding onto your cryptocurrency and not selling it, then good news: you don’t need to report it on your taxes. But keep in mind that if you do sell a cryptocurrency at a profit, then that profit is taxable as income. Just as with any other type of capital gain, you have to pay tax on a crypto sale even if you haven’t converted that capital gain into U.S. dollars yet.
Do I pay taxes on Bitcoin if I don’t sell?
There are several ways to avoid paying taxes on your Bitcoin profits, but only if you don’t cash out your digital currency for traditional currency like US dollars. One of these strategies is called a like-kind exchange, and it allows you to swap one type of asset for another without paying taxes. But even if you do use one of these methods, it’s still important that you report your income—to both Uncle Sam and Uncle Satoshi. Here’s how