Reporting your crypto activity on your tax return can seem daunting, but it doesn’t have to be with this comprehensive guide. We’ll walk you through everything you need to know, from what counts as a taxable event to filling out the right IRS forms. You’ll learn proven strategies to reduce your crypto tax liability so you can file correctly and minimize what you owe.
Is Crypto Taxable?
Before diving into reporting requirements, the first question most have is “Do I even need to report my crypto transactions on my taxes?” The short answer is yes, your crypto is taxable.
Any sale, trade, or exchange of cryptocurrencies triggers a capital gain or capital loss, which makes it a taxable event. This includes:
- Trading one crypto for another (e.g. Bitcoin for Ethereum)
- Selling crypto for fiat currency (e.g. Bitcoin for US dollars)
- Using crypto to purchase goods and services
- Earning crypto income from mining, staking, airdrops, or other activities
Even exchanging one token for another within the same blockchain ecosystem triggers a taxable event.
The bottom line is that the IRS treats crypto as an investment property instead of a currency. So most crypto transactions fall under capital gains and losses reporting rules.
Things That Trigger Taxable Crypto Events
Here are some of the most common taxable crypto transactions:
- Trading crypto: Selling, exchanging, or even just transferring coins between wallets can be taxable events. You have to calculate the capital gain or loss and report it.
- Earning new crypto: Getting paid in crypto or receiving staking rewards and mining fees counts as income. The fair market value at the time you received it gets reported.
- Spending crypto: Purchases with crypto are taxable events if the coins were worth more when you acquired them. You have to calculate the capital gain realized.
- Crypto stored in wallets: Even crypto just being held for investment purposes needs to be reported each year. You’ll report it on Form 8939.
- Airdrops & hard forks: These events give you new coins which the IRS counts as ordinary income. You’ll owe taxes on the value upon receipt.
Some key takeaways are that if you sold or exchanged crypto for profit, you likely owe taxes on the capital gains. Or if you received new coins from interest, staking rewards, or airdrops, you’ll owe income taxes on the fair market value of what you received.
Next we’ll look at how crypto gets taxed…
How Is Crypto Taxed?
In the US, cryptocurrency gets taxed similarly to investment properties like stocks or bonds, instead of as currencies. This means they fall under the capital gains and losses tax guidelines.
How much you’ll owe depends on whether gains & losses were short term or long term. Your tax rate also depends on your overall income. Here’s an overview:
Short-Term vs Long-Term Capital Gains Tax Rates
Short-term capital gains are profits from crypto you sold that was held for 1 year or less. These get taxed at your ordinary income tax rate, which can climb up to 37% for high earners.
Long-term capital gains come from selling crypto held longer than 1 year. The long-term capital gains tax rates range from 0% to 20% depending on your taxable income and filing status.
So your tax obligation on $10,000 in crypto gains can range from $0 to $3,700 depending on whether it was long or short term!
Below are the 2023 long term capital gains tax brackets based on your taxable income:
|Tax Filing Status
|0% Tax Up To
|15% Tax On Income Between
|20% Tax On Income Over
|$0 – $44,625
|$44,626 – $492,300
|$0 – $83,350
|$83,351 – $517,200
|Head of Household
|$0 – $55,800
|$55,801 – $488,500
As you can see, holding crypto longer than a year before selling can significantly reduce your tax bill!
Next let’s dive into all the crypto transactions and activities you need to report…
What Crypto Activity Do You Need to Report?
Now that we’ve covered why crypto is taxable and how it gets taxed, let’s outline all the transactions and activities you’re required to report:
- Trading crypto: Any trades, sales, or exchanges of crypto must be reported. This includes trading one token for another, or trading coins for fiat currency like US dollars.
- Converting coins: Even converting one cryptocurrency to another token triggers taxes, like trading Bitcoin for Ethereum.
- Spending crypto: Making any purchases with crypto is reportable if the coins were worth more when you acquired them originally. You have to calculate the capital gain realized and pay taxes on it.
- Airdrops & hard forks: Receiving new coins through airdrops, hard forks, or income from mining and staking also necessitates reporting. You owe income tax on the fair market value of any coins received.
- Wallet holdings: Your tax reporting requirements even extend to any cryptocurrencies held long-term strictly for investment reasons, even if you didn’t sell or exchange anything during the year.
So in essence, the majority of your crypto activity needs to get reported in some capacity. Next we’ll cover the required forms and tax documents.
What Forms and Documents Do You Need?
To report crypto activity on your tax return, you’ll need to file some additional IRS tax forms that apply specifically to crypto capital gains and losses.
Schedule 1 Addition (Form 1040)
If you sold any crypto assets, you’ll need to file Form 8949 to report the capital gains and losses for each transaction. Form 8949 provides the details on each trade.
Then you’ll total everything up on Schedule D (Form 1040) to summarize your overall gains and losses for the year. Schedule D gets attached to your personal 1040 tax return.
Any net gains then carry over onto Schedule 1 (Form 1040) which further summarizes additional income like crypto earnings. Schedule 1 also gets included with your personal tax return.
For any activity on popular crypto exchanges like Coinbase or Kraken, you should receive a Form 1099 detailing your transactions for the year. It’s like a W2 for earnings.
You’ll need to refer to the 1099 forms from any exchange you use to accurately calculate totals for your 8949 and Schedule D forms.
That covers the key IRS tax forms. Now let’s discuss how software can simplify the reporting process…
Crypto Tax Software
Doing your crypto taxes manually with pen and paper can quickly become an organizational nightmare. That’s why most experts recommend using cryptocurrency tax software to automate the entire reporting process.
Some top crypto tax solutions include:
- CoinTracker: Imports data from wallets & exchanges to generate required forms
- CryptoTrader.Tax: Built-in accounting methods & simplified importing
- ZenLedger: Tax loss harvesting tools & calculator for capital gains
The main benefit of these crypto-specialized tax programs is connecting directly to all your trading exchanges (like Coinbase), DeFi platforms, and even individual wallets to automatically import all transaction history.
So rather than gathering hundreds of individual data points, entries, fees, etc. yourself, the tax software compiles all the data in one place and uses it to accurately generate the IRS-required forms. This includes:
- Form 8949 to report individual transactions
- Schedule D to summarize gains/losses
- Schedule 1 to report additional income
- Form 1099s that exchanges provide
So with just a few clicks you can sync everything and run automated tax reports. The software often includes other useful features too, like tax-loss harvesting tools, estimations of what you might owe, and references for cost basis.
Let’s explain more about how cost basis factors in…
Calculate Cost Basis
To accurately calculate capital gains and losses for tax reporting, having the proper cost basis for each coin is crucial.
Your cost basis is what you originally paid for the cryptocurrency. It encompasses:
- Your actual cash purchase price
- Any fees associated with the transactions
- The fair market value of coins you received through mining, airdrops, etc.
When you sell or trade your crypto later on, subtracting your cost basis from the amount you sold it for provides your capital gain or loss.
If you don’t have records for your original cost basis per coin, you can use one of two common methods:
First-In, First-Out (FIFO)
The FIFO accounting method assumes you sell the oldest coins first. So the coins you’ve held the longest get sold first in the eyes of the IRS.
It’s a simple system to figure cost basis, but not always the most accurate approach if you don’t sell oldest coins first in reality.
This approach lets you manually choose which specific coins get sold from your wallets and assign cost basis accordingly.
It leads to the most accurate gain calculations but also takes more detailed record keeping up front.
So in summary – make sure you have your original cost basis per coin to accurately calculate your gains and losses. And if not, most tax software includes FIFO or specific identification options when importing your data.
Next up: How to leverage crypto tax loss harvesting to save money…
Crypto Tax Loss Harvesting
If you sold any coins at a lower price than you paid for them originally, you likely incurred capital losses, which can benefit you at tax time.
Introducing crypto tax loss harvesting – the strategic selling of tokens at an opportune time to realize losses that can offset your tax liability.
Here is a simple example…
- In June you purchased 1 Bitcoin for $20,000
- By December the price dropped to $16,000
- You sell it at this lower price to “harvest” the $4,000 capital loss
The goal is to use that harvested loss to offset your capital gains from other crypto sales. Here is how it balances out:
- $10,000 short term capital gains realized from selling Ethereum
- $4,000 capital loss harvested from selling Bitcoin
- $6,000 net capital gain gets reported ($10k gains – $4k loss)
So by strategically realizing losses, you reduced your overall capital gain that’s subject to being taxed by $4,000 in this scenario!
Crypto tax software makes finding opportunities to harvest losses for fewer taxes easy. For example, you tell the tool you need $5,000 in losses and it shows you which coins to sell to achieve that goal and lower your tax obligation.
Other Important Tips
Beyond the major points covered so far, here are some final best practices when handling cryptocurrency taxes:
- Keep detailed records of every crypto purchase, sale, trade, expense, type of coin, wallet used, etc. This provides proof if ever audited.
- Consider hiring a crypto tax professional to handle everything for you if you have extensive holdings.
- Don’t ignore crypto tax reporting obligations as penalties and interest can cause costs to spiral quickly.
- File an extension by April 15 if you need more time to gather records or prepare forms.
And those are all the basics for properly reporting your crypto activity and transactions on your tax return!
Conclusion and Next Steps
Reporting cryptocurrency transactions accurately doesn’t have to be overly complex with the right guidance. To recap, you learned:
- Nearly all crypto transactions are considered taxable events
- Short term vs long term capital gains have different tax rates
- Required forms like 8949, Schedule D & Schedule 1 itemize activity
- Crypto tax software can compile all transaction data and produce completed IRS forms
- Properly calculating cost basis is crucial
- Tax loss harvesting reduces tax liability by offsetting gains with losses
From trading coins to mining and staking to making purchases with crypto, now you know all major activities need to get reported.
Next steps are to start aggregating your transaction history across wallets and exchanges so your data is ready to import into tax reporting software. Be sure to also calculate your cost basis for all coins.
Lastly bookmark this page to use as a reference when tax time comes next year!