We’ve all been there. On the 14th of April, staying up late at night, trying to figure out how to report our taxes. Maybe you’re lucky enough to have worked with an accountant before, but that’s stressful too, with all the questions you might have to ask.
When it comes to cryptocurrency tax reporting, you might be feeling even more stressed. But, unfortunately, this isn’t your average 1040-EZ situation.
It’s complicated, and if it’s your first time doing your taxes after having invested in or traded crypto, figuring out how to file taxes can be overwhelming.
Fortunately, in this cryptocurrency tax guide, we’ll review how you can file your crypto taxes in 2022.
Finally, you can file your taxes correctly, ensuring that you can report them accurately, following tax laws. Read on to learn more.
Is Cryptocurrency Tax Reporting Something I Need to Do?
Most people who interacted with cryptocurrency in 2021 will need to file taxes in 2022 and report some of their activities related to these virtual currencies. However, there are some cases where you don’t end up engaging in a taxable event.
We’ll go into that in just a moment. First, however, we’ll explain in this crypto tax guide what activity types count as taxable events when you’re filling out your forms for tax.
The IRS has made this clear by pushing the language in Form 1040.
In 2020, the IRS asked if anyone had exchanged, sent, sold, received, or otherwise acquired any financial interest in any virtual currency.
The IRS was indicating that people no longer had any reason to say that they didn’t realize they had to report their virtual currency transactions.
When you check yes to this question on Form 1040, the IRS will check to see if you additionally filed Form 8949
This form indicated you would use it to report gains and losses on equities or stocks. If you don’t file this form, and the IRS expects you to because of your checking yes above, you could likely be audited.
However, as we mentioned, not all activity related to cryptocurrency is taxable. So let’s review that now.
Crypto Activities That Are Taxable
When you’re transacting and investing with cryptocurrency, it will be taxed similarly to how stocks are. Therefore, when reporting your cryptocurrency, you should report your capital losses and gains when you dispose of it.
You need to report several cryptocurrency activities when filing your taxes.
These activities include trading one specific crypto for another and selling your cryptocurrency for cash.
Additionally, the following cryptocurrency activity is taxable: paying a merchant using crypto. Note that if you’re a user of a crypto debit card, this situation will also apply to you.
It’s not just when you’re reporting losses or gains on your tax returns that you need to inform your crypto activities. There are a few different situations you might need to report.
For example, if you were paid in cryptocurrency, you would need to report these events as income.
Some examples include mining or staking cryptocurrency, receiving airdrop tokens due to a hard fork, and getting paid in crypto.
Reporting as Income and Property
Depending on how you use it, you might report your cryptocurrency as income and property. For example, let’s say that you work in the gig economy, received payment in cryptocurrency, and then used that payment to buy yourself a coffee.
In this case, you would have to report your cryptocurrency twice.
First, you’d report it on Form 1040 as income (when you were paid). Second, you’d report it on Form 8949 for your capital loss or gain when you disposed of your cryptocurrency to pay for your coffee.
Because every sale or trade counts as a taxable event, cryptocurrency traders can often end up with hundreds, thousands even, transactions they have to report.
You have to report all these activities, even if you end up experiencing a capital loss.
It’s not all bad. For example, you could lessen your tax burden if you report a capital loss. Occasionally, this will result in a larger refund.
Crypto Activities That Aren’t Taxable
Now that we’ve reviewed the different types of taxable cryptocurrency activities, we’ll review the ones that aren’t. If you have any doubts about these activities, you can feel reassured that you won’t have to report them when filing your taxes.
An example of a cryptocurrency activity you wouldn’t have to include on Form 8949 includes transferring between exchange assets that are like for like.
Another example is buying cryptocurrency, though you should consider that it will set the cost basis.
Additionally, this isn’t a taxable activity if you gift any cryptocurrency. However, it’s important to note that large gifts, which might trigger other types of tax obligations, are excluded from this.
If you donate cryptocurrency, this also isn’t taxable. In fact, it’s tax-deductible, so you’ll want to report it, so you get a deduction! The same goes for gifting. Who doesn’t love an itemized charitable deduction?
How to Complete Your Cryptocurrency Tax Reporting
To complete your cryptocurrency tax reporting, there are several steps you need to take. These include calculating your cryptocurrency gains and losses, completing Form 8949, including the totals you come up with on Form 8949 on Form Schedule D, etc.
Calculating Your Cryptocurrency Gains and Losses
The first thing you need to do to complete your crypto tax reporting is to calculate your cryptocurrency gains and losses. It is essential to calculate profits and losses because any time you dispose of any of your cryptocurrency counts as a capital loss or capital gain.
These events might include trading your crypto (for another one), selling your cryptocurrency (for fiat), or buying services or goods with your crypto.
As we mentioned earlier, there might be many gains and losses you end up counting regarding your cryptocurrency.
For this reason, it’s essential to keep track of the times you’ve engaged in any of the above cryptocurrency activities.
Once these activities are accounted for, it’s time to calculate your loss or gain. To do this, you need to track how each of your assets’ prices had changed from that time when you received them originally.
A formula makes it possible for you to make this calculation. It looks like this: the asset’s value is divided by the cost basis at the time of sale.
After calculating this amount for each cryptocurrency activity that counts as a capital loss or gain, it’s time to report it, which takes us to the next step.
Completing Form 8949
The IRS tax form, Form 8949, is a form people use to report the disposals and sales of capital assets. More traditional capital asset types include bonds and stocks. Now, cryptocurrencies also count as capital assets, so you’ll have to fill out this form if you complete taxable cryptocurrency activities.
In addition to reporting the total losses and gains that you calculated, there’s additional information you’ll need to include on this form. (This is information you’ll need to provide for every transaction).
These include (a) a description of the sold property, (b) the date at which you acquired the property initially, (c) the date you disposed of or sold the property, (d) and the proceeds you got from the sale (the fair market value).
They also include (e) the cost basis for the property purchasing and (h) your loss or gain.
Include Your Totals on Schedule D
Once you’ve finished completing Form 8949, you’ll have a total for your net loss or net gain. The next step is for you to include that total on the tax form Schedule D. This is a tax form you can use to report your capital losses and gains from cryptocurrency and the total from all sources.
So, in addition to the long-term and short-term gains that have come from your cryptocurrency activity and Form 8949, you’ll also include other line items on Schedule D.
These include trusts, estates, and Schedule K-1s (via businesses).
Include Your Cryptocurrency Income
People earn cryptocurrency income through work, referral bonuses, staking, or mining in some scenarios. When this occurs, these people should recognize this as income. Because of this, this income they should report when completing taxes related to income taxes.
There are different forms to fill out if you have crypto income, depending on how you make your cryptocurrency income. We’ll review each of these now.
Did you earn your cryptocurrency income through forks, airdrops, or other hobby or wages income? In this case, you should report this income in Schedule 1 as “other income.” You would report this on Line 8 of the form.
Did you earn your cryptocurrency income through interest rewards due to lending your crypto out? Or did you acquire this income through staking income? You would likely report your cryptocurrency income on Schedule B in these cases.
Do you earn your cryptocurrency income as a business? For example, you might run a business entity where you run a crypto mining operation or get crypto as a job payment. In this case, your cryptocurrency income would likely count as self-employed income.
In the case where it does, you would file your cryptocurrency income using Schedule C.
Note that if you do this, you might be able to deduct some of the costs of running your business. For example, electricity.
Complete the Other Parts of Your Tax Return
Once you’ve done all the calculations and reported your cryptocurrency income and capital losses and gains, you can complete the other parts of your tax return. Again, the rest won’t be related to cryptocurrency and should be easier to fill out.
Using Cryptocurrency Tax Reporting Software
At this point, you might be wondering whether it’s worth using cryptocurrency tax reporting software. Considering that many people who complete cryptocurrency activities complete many of them (for example, losses and gains), this can be a good idea.
This way, it will be much easier for you to calculate how much you have to report without going through a massive number of transactions.
What Happens When You Don’t Report Your Cryptocurrency
Given how complex it is to report your cryptocurrency when doing your taxes, it can be tempting not to report it. However, this isn’t a good idea, as the government would consider this to be tax evasion. The maximum tax evasion penalty is a fine of $100,000 and five years in jail.
Need More Information?
Now that you’ve learned about cryptocurrency tax reporting so you can file in 2022, you might need more information. For example, maybe you want to learn more about how to fill out the specific schedules we’ve mentioned, or you would like help figuring out what type of crypto activities.
Whatever information you need, we can help. At Byte Federal, we’re experts in cryptocurrency tax reporting.
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