Depending on what country you live in, your cryptocurrency will be subject to different tax rules. The questions below address implications within the United States, but similar issues arise around the world.
#1 Do I need to report cryptocurrency on my taxes?
Cryptocurrency is treated as property for tax purposes. Just like stocks, bonds, real-estate, and other forms of property, you need to report your capital gains and losses from your cryptocurrency transactions on your tax return—specifically, if you incurred a taxable event during the year. A taxable event is a specific scenario that triggers a tax liability. The below are a list of the taxable events as specified by the IRS cryptocurrency guidance:
- Trading cryptocurrency to fiat currency like the U.S. dollar is a taxable event.
- Trading cryptocurrency to cryptocurrency is a taxable event (you have to calculate the fair market value in USD at the time of the trade).
- Using cryptocurrency for goods and services is a taxable event (again, you have to calculate the fair market value in USD at the time of the trade; you may also end up owing sales tax).
On the other hand, there are other actions that cryptocurrency enthusiasts also commonly take that are NOT taxable events and do not trigger a tax reporting requirement. Listed below are scenarios in which traders do not trigger a tax event:
- Giving cryptocurrency as a gift is not a taxable event
- A wallet-to-wallet transfer is not a taxable event (you can transfer between exchanges or wallets without realizing capital gains and losses, so make sure to check your records against the records of your exchanges, because they may count transfers as taxable events, like they are a safe harbor).
- Buying cryptocurrency with USD is not a taxable event. You don’t realize gains until you dispose of your crypto.
Let’s say you buy 1 BTC from Coinbase, and you just hold this crypto for the year. In this case, you have no reporting requirement, as you have not triggered a taxable event. Even if you send this to an offline wallet, you still do not need to report this, as merely sending crypto from one place to another is not a taxable event.
Now instead let’s say you send this 1 BTC to Binance and start trading it for other altcoins. Now you have incurred a taxable event (trading one cryptocurrency for another) and you need to report these transactions on your taxes and file them with your tax return, even if you lost money on the trades.
Keep in mind that mining cryptocurrency is also taxable and is treated as income.
#2 Can I save money on my taxes if I lost money trading?
Yes. If you realized losses throughout the year from trading cryptocurrency, these losses can and should be used to offset other capital gains as well as up to $3,000 in ordinary income. Keep in mind, you need to “realize” these gains to be able to write them off on your crypto taxes.
#3 How do I file my crypto taxes?
If you are simply buying, selling, and trading cryptocurrencies you will report the capital gains and losses from these trades on IRS Form 8949. You will report each crypto-to-crypto trade and each taxable event from the calendar year on this form. After each taxable event is listed out on 8949, you will total up your net capital gains and losses at the bottom. This total will flow into your 1040 Schedule D. You should include these forms with your entire tax return upon filing.
You can also use crypto tax software to automatically build these tax reports. If you don’t have your own records of historical prices, dates and fair market values of your trades, they will be automatically retrieved.
#4 What will happen if I don’t report my crypto activity?
The reality is that no one knows for sure. However, it is not advised.
The IRS has begun strictly enforcing cryptocurrency taxes with their 10,000 warning letters that they sent to US cryptocurrency holders. The agency also publicly stated on July 2, 2018 that one of their core campaigns and focuses for the year is the taxation of virtual currencies. Lack of reporting will be treated as tax fraud.
#5 Cryptocurrencies change in value all of the time. How do I know what value to report to the IRS?
Virtual currency wages, self-employment income or cryptocurrency trades should be reported using the full fair market value of the cryptocurrency at the time the transaction happened. You should use the price that your exchange listed the cryptocurrency at the time of the transaction or use a data aggregator to lookup the fair market value.
#6 Why can’t my cryptocurrency exchanges provide me with tax documents?
Cryptocurrency exchanges are unable to provide their users with accurate tax documentation. This is a big problem in the industry.
By the nature of the blockchain technology that exchanges operate on, users are able to send Bitcoin and other cryptocurrencies to wallet addresses outside of their own network. An example of this would look like you buying Bitcoin through Coinbase and then sending it to a Binance wallet address in order to acquire new coins and assets on Binance that Coinbase does not offer.
Because you can send cryptocurrencies from other platforms onto exchanges like Coinbase at any time, Coinbase has no possible way of knowing how, when, where or at what cost you acquired that cryptocurrency that you sent in. Coinbase only sees that it showed up in your Coinbase wallet.
This means that anytime you move crypto assets off of Coinbase or into Coinbase from another location, Coinbase completely loses the ability to provide you with accurate tax information. This is because it has no way of identifying what your cost basis is in that certain cryptocurrency, which is an essential piece to figure out your capital gain or loss. This is also true of all other major cryptocurrency exchanges.
The solution to this problem is to leverage crypto tax aggregating tools to collect your data from all platforms to build your holistic tax reports.
About the author:
David Kemmerer is the CEO and co-founder of CryptoTrader.Tax, cryptocurrency-focused tax software for automating your tax reporting.