The United States Internal Revenue Service (IRS) has been paying close attention to the taxation of cryptocurrencies and blockchain assets as they gain popularity and widespread adoption. It is important to accurately track and report crypto transactions to avoid penalties and fines.
To help with tracking and reporting crypto transactions for tax purposes in the US, here is a comprehensive guide.
Taxation of Cryptocurrency in the US:
If you invest in crypto assets, such as nonfungible tokens (NFTs), and engage in transactions that result in gains, you need to be prepared for crypto taxation.
It’s important to note that simply buying crypto or holding it in your portfolio while its value fluctuates is not taxable. Taxes come into play when you sell, invest, or dispose of the asset for gains.
There are two ways in which cryptocurrency is taxed: capital gains tax and income tax.
Capital Gains Tax:
This applies to profits made from selling an asset that was purchased at a lower price. Any gains realized from selling or trading a digital asset for a higher price are subject to capital gains tax.
If the crypto assets were held for less than a year, it is considered a short-term gain. If it was held for more than a year, it is classified as a long-term gain.
Capital gains events include selling cryptocurrency for fiat currency, sending cryptocurrency (over $15,000) as a gift, purchasing goods and services with cryptocurrency, and trading or swapping one digital asset for another. This also includes purchasing NFTs with cryptocurrency.
Accurately tracking all crypto transactions is crucial for tax purposes. Additionally, declaring capital losses can help offset capital gains tax.
Income Tax:
Income tax applies to earnings from mining and staking tokens. This includes receiving cryptocurrency from an airdrop, crypto interest earnings from decentralized finance (DeFi) lending, and receiving cryptocurrency as payment for labor.
Long-Term Cryptocurrency Tax Rates:
The IRS applies long-term cryptocurrency tax rates to gains on cryptocurrencies held for over a year. For single individuals, no tax is levied on crypto gains up to $44,625. For individuals filing as heads of household or married couples filing jointly, the rates range from 0% to 20% based on income tax brackets.
Short-Term Cryptocurrency Tax Rates:
Short-term crypto gains, which are gains on cryptocurrencies held for 365 days or less, are taxed at ordinary income tax rates. These rates range from 10% to 37% based on income brackets for single filers, married couples filing jointly, and heads of household.
When Cryptocurrency is Not Taxed:
There are certain cryptocurrency transactions that are not subject to capital gains or income tax. These include purchasing cryptocurrency with fiat currency, holding cryptocurrencies without selling them, moving cryptocurrency between your own wallets, gifting cryptocurrency amounting to less than $15,000, donating cryptocurrency to charities (which may be tax deductible), and creating an NFT without selling it.
Tracking Crypto Transactions:
Accurately tracking and reporting all cryptocurrency transactions is essential. There are purpose-built crypto tax software solutions available for this purpose, such as Koinly, CoinLedger, and Accointing.
If you prefer to do it yourself, here is a step-by-step guide:
1. Identify and organize all cryptocurrency transactions, including trades, purchases, and sales. Make a list of the cryptocurrency or asset type, transaction date, amount, and value at the time of the transaction. Note the relevant wallet addresses.
2. Calculate the cost basis for each transaction, including the purchase price, fees, and other costs incurred.
3. Determine the gain or loss on each transaction, which is the difference between the cost basis and the fair market value of the cryptocurrency at the time of sale or trade.
4. Separate short-term and long-term transactions based on how long you’ve held the crypto asset.
By keeping accurate records and staying informed about tax guidelines, you can navigate the tax implications of your cryptocurrency investments. While there are still uncertainties regarding taxing crypto, the IRS is working to address them.
Reporting Crypto Holdings on Taxes:
After accurately tracking your crypto transactions, you need to report them to the IRS for tax purposes.
Reporting Capital Gains and Losses:
Use crypto tax Form 8949 to report the sales and disposals of capital assets, including cryptocurrencies. The form has two parts: Part I for short-term disposals and Part II for long-term disposals. Check the relevant box based on whether your transaction was reported on Form 1099. If exchanges don’t issue Form 1099-B for crypto transactions, select option C on Form 8949. Provide all required information, such as the crypto asset description, acquisition date, disposal date, fair market value, cost basis, and gain or loss.
Once Form 8949 is filled out, report the total gain or loss on Schedule D of Form 1040.
Reporting Crypto Income:
Report all crypto income on Form 1040, along with capital gains or losses from crypto transactions. Form 1040 includes a crypto question that asks about receiving crypto as a reward or compensation and selling, exchanging, gifting, or disposing of a digital asset. Report self-employment crypto income in Schedule C and other crypto income in Schedule 1.
It is advisable to consult a tax professional for guidance on accurately filing your cryptocurrency taxes and reporting them correctly on your tax return.