A new popular question on the IRS form 1040 raised a new wave of doubts concerning the need to report your crypto on taxes. Even today, many people wonder if crypto is taxable and if you need to report any of your trades.
In the US, cryptocurrency is considered property and taxed similarly to stocks. In the US, trading cryptocurrencies are taxable events, making crypto tax reporting a must-do.
Today, we’ll clarify all the details about reporting crypto transactions on your tax return.
In this article:
Do I have to report crypto on taxes?
In short, yes! Firstly, you need to evaluate if your crypto transactions are taxable events in the US.
As a reference, any crypto-to-crypto trades or crypto-to-FIAT trades are taxable events. Moreover, any purchase made with cryptocurrencies, whether directly or using a crypto debit card, is also a taxable event. As a result, you’ll have to determine the gain or the loss on each transaction and report it.
Please be aware that this means you need to report each trade, regardless of whether you are making a profit or not. Moreover, the need to report remains whether your capital gain is long-term or short-term.
Besides capital gains, you may also have transactions involving cryptocurrency that need to be reported and taxed differently. If you earn any interest paid in crypto or FIAT, you’ll have to include it in your total taxable income. As a result, you’ll have to report it on your income tax return as interest or ordinary income.
The same is true if you decide to get paid in Bitcoin as your salary or as an independent contractor. Furthermore, receiving crypto from an airdrop or hard fork will also impact your total income and will need to be reported on your income tax return.
What about if the transactions are not taxable events?
Currently, few transactions involving cryptocurrency are not taxable. For example, buying Bitcoin or any other cryptocurrency with FIAT (e.g., USD) is not a taxable event. Moreover, holding that crypto without making any additional trades is also not taxable, even if the crypto changes in price.
Get clarification about all the crypto tax implications when trading crypto in this comprehensive guide. So, if buying and holding are not taxable, do you need to report anything? Let’s see.
Do I need to answer “Yes” to the cryptocurrency question on IRS Form 1040?
In 2019, the IRS added a question on form 1040, asking taxpayers if during the year they acquired any cryptocurrency. Until recently, the recommendation was to answer “Yes” even if you only bought cryptocurrency with FIAT and didn’t make any additional trades.
However, in 2021, the IRS clarified this issue and clearly stated that if you only buy crypto with FIAT and hold it without making any additional trades, you can answer “No” to the question. In this case, you won’t have any additional crypto tax reporting until you sell for FIAT or another crypto.
Please note that this applies to crypto trading only. You still need to report your crypto taxes if you received crypto as interest income, salaries, commissions, hard forks, airdrops, etc.
How to report crypto taxes?
We’ve seen that if you only buy crypto and do not make any other transaction, you don’t have to answer “Yes” to the question, but you still need to know how to answer it due to legal implications. Nevertheless, if you make additional crypto trades, you have to be aware of two other areas of crypto tax reporting.
Firstly, all transactions involving selling, such as crypto-to-crypto or crypto-to-FIAT, need to be reported on Form 8949 and Schedule D of your Form 1040. You need to determine the gain/loss for each of those trades and report it.
Secondly, other cases such as earning interest in crypto, getting paid in Bitcoin, or receiving an airdrop or hard fork, need to be reported on your income tax return.
When to report crypto on taxes?
In the US, you have to keep track of your transactions and report them for each fiscal year (ending on Dec. 31). You must keep track of every transaction and calculate each gain or loss according to the guidelines we covered before.
Once the tax season opens in the US, you’ll have to answer the cryptocurrency question in the form 1040, report all your trades and their aggregated gain/loss, and if that’s the case, include your crypto income in your tax return. In 2021, the deadline to file crypto taxes individually (federal income tax filing due date) is May 17, 2021, postponed from the original April 15 tax filing deadline.
Can the IRS track cryptocurrency?
With the emergence of DeFi, many crypto enthusiasts believe it would be impossible for the IRS to know their trades. However, the IRS has tools (e.g., Chainalysis) to find taxpayers who hide their crypto transactions and avoid reporting them. Moreover, more exchanges are reporting data to the IRS about clients trading crypto in high amounts.
For example, recent news surfaced that Coinbase and Circle communicated clients’ data to the IRS for these purposes. One popular ramification of these data reports resulted in taxpayers receiving IRS letters (“CP2000”) in 2020 with voluptuous amounts of taxes due for not reporting them to the IRS.
Our advice is to go with the reporting route to avoid these issues. With CoinTracking, you can easily keep track of all trades and gains while generating the tax reporting needed to comply with regulations in your country.
*This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions.
Learn how CoinTracking generates the necessary tax reports for compliance in your country:
CoinTracking helps to report crypto on your tax return, besides:
Importing your transactions (API & CSV) from 110+ exchanges/wallets
Tracking all your DEX transactions (e.g., Uniswap).
Importing all your Binance Smart Chain trades.
25+ reports, including which coins offer you a reduced tax rate.
Calculating Gains automatically according to 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB).
Creating ready to-go Tax Reports worldwide.
If you need personalized help reviewing your trades or preparing your US tax returns, check out our CoinTracking Full Service. A team of crypto tax experts led by Sharon Yip, who helped us with this article, provides assistance for CT Full Service.
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Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.