LetsExchange / LetsExchange Blog / How to Report Crypto on Taxes

How to Report Crypto on Taxes

Dec 23, 2022 6 min read

In several countries, crypto transactions are taxable. So, unless you live in one of the most crypto-friendly countries, you must pay taxes on your crypto holdings and/or earnings. However, since cryptocurrencies are relatively new assets, many traders and investors need to learn how to report their crypto transactions on their tax returns. If you need to know how to report crypto on taxes, the following guide will take you through the process in a few simple steps.

When Is It Necessary to Pay Taxes on Cryptocurrencies?

The Internal Revenue Service (IRS) in the United States considers cryptocurrencies as property. Therefore, the taxable value of your crypto holding is based on capital gains or losses. Payments in crypto are taxed as regular income. Hence, the crypto taxes you must report include the following:

  • Capital Gain Taxes. Any profit from selling, trading, spending, or gifting crypto.
  • Income Taxes. They apply to any crypto earning, including payments, mining rewards, staking gains, interest on crypto lending, etc.

Also, the amount of time you own a crypto asset determines how you must report it. Holding onto crypto for more than a year would usually qualify as a long-term capital gain. Otherwise, it is a short-term gain. Buying crypto with fiat money on an exchange like LetsExchange.io is not taxable. But you owe crypto taxes if you spend your crypto, and its value increased from when you bought it. Swapping coins is also a taxable event if you made gains.

Why You Need to File Cryptocurrency Taxes

You must file crypto taxes because the Law requires it. When cryptocurrencies emerged, they were widely regarded as assets that could easily evade taxation. It is no longer the case. Blockchains are transparent, and authorities use this characteristic to track crypto transactions for taxation. Failing to report crypto on taxes can lead to a fine or, in some cases, a prison term.

When to Pay Taxes on Cryptocurrencies

In the United States, the IRS expects you to report your crypto gains, losses, and income by April 15, 2023. All US residents who have invested or traded in cryptocurrency are obliged to comply.

Cryptocurrency Tax Rates for 2023

For long-term crypto taxes, these rates will apply to your 2023 tax return:

Short-term crypto gains are taxed in 2023 with these rates:

How to Report Cryptocurrencies for Taxes

You might need some of these forms for your crypto reporting, depending on the type of investments and transactions you have made:

  • IRS Form 8949
  • Schedule D
  • Schedule 1
  • Schedule C
  • Form 1040 (Individual Tax Return Form).

You use IRS Form 8949, Schedule D, and Form 1040 to report your crypto capital gains and losses. To report your crypto income, you use Schedule 1, Schedule C, and form 1040. So, you must report each sale of crypto during the tax year on the IRS Form 8949. Use separate Form 8949s to report other non-crypto investments.

Calculate Cryptocurrency Taxes

The first thing to do is calculate your crypto totals, which comprise the following:

  • Capital gains
  • Capital losses
  • Income from crypto
  • Any expenses related to your crypto investments.

To calculate capital gains and losses, you must compute the difference between the asset’s value at the time of its disposal and its cost basis (what you paid to acquire the asset). The cost basis includes any transaction, brokerage, or gas fees. These calculations are pretty straightforward when the cost basis of each asset is known. However, when some cost bases are missing or the volume of trades is relatively high, you probably will need crypto tax software to ease this step.

Fill Out Form 8949

To complete Form 8949, you must first fill in the initial information at the top; Select checkbox A, B, or C in Part I for short-term trades. In most cases, you will have to select checkbox C since exchanges usually do not provide crypto 1099s. Then, you must organize your calculations row by row, including the details requested on each column (see the example below taken from tokentax.co).

Next, you must include your totals in the aggregate boxes at the bottom of the form. You must sum the proceeds, costs, gains, and losses where indicated. Voila! You are done with Part I of the form. Now, you must repeat the procedure described above for your long-term trades, which you report in Part II of Form 8949.

Include Totals from 8949 in Appendix D

To report your overall capital gains and losses, include Form 8949 with Form 1040 Schedule D. Make sure to list short-term and long-term capital gains and losses separately since they are taxed with different rates.

Report Crypto Income

Now that you are done with reporting capital gains and losses, you must report your crypto income. Here, you include income from crypto mining, staking, airdrops, payments in cryptocurrency, crypto lending interest, etc. You must use Form 1040 Schedule 1 for this purpose.

If you conduct business for yourself or as a sole proprietor, you must report self-employment income using Form 1040 Schedule C instead of Form 1040 Schedule 1. Most crypto miners are considered self-employed. In this case, you could deduct some crypto mining expenses like your hardware and electricity billed (if metered separately).

Fill In the Declaration

After filling in the above forms, you have completed your crypto tax reporting. All you need to do is complete the rest of your taxes. Remember, you must file your tax return by April 15, 2023.

Can Cryptocurrency Taxes Be Legally Avoided?

If you want to avoid taxes on your crypto gains, you can give them to a charity. You can deduct donations given to a qualified charity. You could also gift crypto to your relatives and avoid paying taxes on your gains. The beneficiary will not have to pay any gift tax either.

Can the IRS Track Crypto?

Tracking cryptocurrency is a difficult task, but it is possible. One can assume the IRS has the means to track crypto if needed.  The IRS asks taxpayers on Form 1040 if they engaged in any crypto activities. If the IRS suspects you lied when answering this question, they can verify your statement. Giving a false statement is penalized.

Conclusion

We have presented a brief guide to reporting crypto on taxes for residents in the United States. You must report crypto capital gains and losses as well as crypto income. If you are a resident of a different country, consult a tax lawyer about the taxes you must pay.

FAQs

Do I have to report my crypto on taxes?

Yes, if the Law requires it in your country of residence. In the United States, you must report crypto taxes.

How much do you have to make in crypto to report taxes?

You must report any crypto payments and gains for taxation in the United States.

Do you have to report crypto under $600?

Yes, you must report it in the United States.

What happens if you don’t report your crypto on taxes?

Failing to report crypto on taxes is considered tax evasion, an offense penalized with fines and, in some cases, prison.


Stay tuned for further updates, crypto guides, and market insights from LetsExchange. You can also follow us on Twitter, Facebook, Reddit, Instagram, LinkedIn, Medium, Quora, Telegram, Steemit, and Bitcointalk for first-hand information from our team.