As the IRS increases the enforcement of cryptocurrency taxation, it is becoming increasingly important to prepare your necessary cryptocurrency tax forms accurately and timely. This guide will discuss tips for accurate crypto tax reporting.
Depending on what country you live in, your cryptocurrency will be subject to different tax rules. The tips below address implications within the United States, but similar issues arise around the world.
Because cryptocurrencies are treated as property in the eyes of the law, they are subject to capital gains and losses rules just like stocks, bonds, real estate, and other forms of property.
The challenge with cryptocurrency in regards to taxes is that the data making up your crypto buys, sells, trades, transfers, mining income, forks, splits, air drops, wallet transactions, and other crypto activity is likely scattered across many different platforms and exchanges. This can make the tax calculation and reporting process difficult.
These four tips will help make the crypto tax reporting process easier and allow you to stay in the good graces of the law.
1. Keep Records of Your Exchanges
Exchange data is essential in the Crypto and Bitcoin tax reporting process. Exchanges are likely the places where you originally converted FIAT currency into cryptocurrency, and thus your cost basis is originally established here. You should have complete historical data from every exchange that you have used. Most exchanges have an option that allow you to export your complete trading history.
Having this data on hand will make the reporting process easy whether you are doing calculations by hand or with the help of crypto tax software.
2. Keep Records of Any Crypto You Received as Income
Cryptocurrency that is received as income is treated differently than crypto trades for tax purposes. It’s important that you have records of income events such as mining payouts, crypto received from a job, or any other form of cryptocurrency received as income. You should keep track of the amount of crypto received as well as the date and time that you received it.
If you haven’t been keeping records of this data, you can use crypto tax calculators to track down the historical data.
3. Understand How to Calculate Your Capital Gains and Losses
You owe taxes on what you gained from trading, so it’s important to understand how to calculate your gains. To calculate your capital gains and losses, you use this formula:
Fair Market Value – Cost Basis = Capital Gain / Loss
Cost Basis is the original value of an asset for tax purposes. In the world of crypto, your cost basis is essentially how much it cost you to acquire the coin.
Fair market value is just how much an asset would sell for on the open market. Again with cryptocurrency, this fair market value is how much the coin was worth in terms of US dollars at the time of the sale.
Therefore to calculate your gain or loss on each trade, you need to know at what USD value you acquired the crypto for and at what USD value you traded or sold it for. If you haven’t been keeping track of the USD value of your trades, you can use crypto tax software to crunch those numbers for you.
5. Understand that You Can Save Money on Your Tax Bill by Filing your Crypto Losses
When you realize a capital gain (you sold your crypto for more than you purchased it for), you owe a tax on the dollar amount of the gain. However, when you sell (or trade) your crypto for less than you purchased it for, you incur a capital loss, and you can use this loss to offset gains from other trades or even a gain from the sale of other property like stocks in your portfolio. This can save you a substantial amount of money if you have heavy losses.
While tax season isn’t the most fun time of the year, it doesn’t have to be stressful. Keep good records and leverage the crypto tax tools that are out there to seamlessly file your cryptocurrency taxes for the year.
David Kemmerer is the CEO & Co-Founder of CryptoTrader.Tax, a cryptocurrency tax reporting platform.