Cryptocurrencies have amassed a massive amount of attention and interest over the years. This steady rise in popularity has caused Governments to keep a critical eye on cryptocurrencies. Given how laws and regulations on crypto tax are frequently thrown about, it is not surprising that crypto traders are utterly confused with crypto tax.
- 1 The Basics of Crypto Tax
- 2 The IRS on Crypto Tax
- 3 Calculating Your Crypto Capital Gains and Capital Losses
- 4 Filing your Crypto Tax
- 5 Crypto Tax Software
The Basics of Crypto Tax
According to the Internal Revenue Service (IRS), cryptocurrencies ought to be treated as property for tax purposes. As in the case of stocks, you need to report your capital gains and losses from your cryptocurrency trades. Failing to do this will land you in trouble with the IRS.
The IRS on Crypto Tax
The IRS recently issued new crypto tax guidance for the first time since 2014. This new crypto tax guidance provides clarity on some issues that seem to have perplexed most crypto traders. Here are a few things the IRS has addressed.
Cryptocurrency Hard Forks
If a cryptocurrency that you are holding goes through a hard fork, the newly forked cryptocurrency that you receive is taxed as income. If you do not receive a new cryptocurrency after a hard fork, you will not have any taxable income.
Cryptocurrency Soft Forks
According to the FAQ section on the IRS official website, soft forks do not give rise to tax. This conclusion is based on the IRS’ assumption that a taxpayer who owns virtual currency on a ledger that undergoes a soft fork will not receive new coins as a result of the soft fork.
Before the new guidance was issued, crypto traders were unsure as to how to assign a cost basis for their cryptocurrency assets.
In the new ruling, the IRS mentioned that taxpayers could select which units and lots of the cryptocurrency they are selling at a given time, so long as they could accurately identify them and support the cost basis of said units.
To correctly identify a unit of cryptocurrency, you must include the following information:
- The date and time of the acquisition of every unit
- The basis and the fair market value of each unit at the time it was acquired
- The date and time every unit was sold, exchanged, or otherwise disposed of
- The fair market value of every unit when sold, exchanged or disposed of, and the amount or the value of property received for every unit
Calculating Your Crypto Capital Gains and Capital Losses
Calculating capital gains and losses on your cryptocurrency transactions is reasonably straightforward. However, it is vital to understand taxable and non-taxable events.
Taxable Events for Cryptocurrency
A taxable event is a specific action that triggers a tax reporting liability. Whenever one of these taxable events occurs, you trigger a capital gain or capital loss that you need to report on your crypto tax return. The following situations constitute a taxable event.
- Trading cryptocurrency for a conventional fiat currency like the US dollar is a taxable event
- Trading cryptocurrency for another cryptocurrency is a taxable event (be sure to calculate the fair market value in USD at the time of the trade)
- Using cryptocurrency to pay for goods and services is a taxable event
- Earning cryptocurrency as a form of income is a taxable event (i.e.from mining or other types of earned cryptocurrency)
Non Taxable Events for Cryptocurrency
- Gifting cryptocurrency is not a taxable event
- A transfer of cryptocurrencies among your wallets is not a taxable event
- Buying cryptocurrency using USD is not a taxable event (you are not subject to capital gains until you trade, use, or sell your crypto)
Filing your Crypto Tax
To correctly file and report your crypto transactions, you need IRS form 8949 and 1040 Schedule D forms.
Make sure you declare your cryptocurrency trades and sales onto form 8949 along with the date you on which you acquired the crypto, the date on which you traded or sold it, your proceeds (i.e., Fair Market Value), your cost basis, and finally, your gain or loss.
Once all of the above are listed, total the amount and transfer it to your 1040 Schedule D. You need to include both of these forms with your yearly crypto tax return.
Crypto Tax Software
Here are a few crypto tax calculators that can make the otherwise arduous process of filing your crypto tax easy.
Zenledger is one of the newer crypto tax calculators on the market.
Crypto traders have no problem importing their cryptocurrency transactions and calculating their crypto tax. It boasts the following features –
- TurboTax integration: When you complete your crypto tax calculation, you can download a pre-formatted file to use for TurboTax.
- FinCen reporting: ZenLedger automatically calculates the value of your holdings in foreign exchanges and informs you if you need to report your holdings to the Financial Crimes Enforcement Network (FinCen)
- Tax-loss harvesting: Tax-loss harvesting is a strategy that helps you reduce your investment losses.
- Transaction drill-in: You can look at all your buys, sales, and holdings in a single screen.
In addition to the above, ZenLedger is known for its prompt customer service.
TokenTax makes it significantly easy for you to handle your crypto tax. This crypto tax platform is known to support every major exchange.
TokenTax displays all your transactions, your total profit and loss, your capital gains, your crypto tax liability, your mining, and a lot more.
TokenTax is also known to correctly handle margin trades from Bitmex, Deribit Bitfinex, Poloniex, FTX, and so forth.
You can use TokenTax in most countries around the globe, including the United States, Canada, United Kingdom, Germany, Sweden, or Japan.