Calculating and filing your crypto tax returns in the United States
If you own cryptocurrency, it’s important to ensure you’re filing your taxes appropriately. It’s not necessarily difficult to file, but you must follow the rules and avoid making mistakes. For example, how should you report your crypto gains? How do you file your crypto taxes? Is that taxable income or capital gains?
There are a lot of questions to answer when it comes to calculating and filing your crypto tax returns. This article will teach you how to easily calculate your crypto tax returns and get them filed with the IRS so that you don’t have to worry about any unpleasant surprises in the future.
Why and How is Crypto Taxed
In the United States, cryptocurrency is taxed as property. Therefore, every time you buy, sell, or trade crypto, you must report it on your taxes. Cryptocurrency is taxed because the IRS views it as property, not currency.
As a result, you’re subject to capital gains taxes when you buy, sell, or trade crypto. The tax rate on a cryptocurrency transaction will depend on whether you have a net gain or loss in your trading activity.
A net gain occurs when an individual sells or trades their cryptocurrency for more than they bought. Conversely, a net loss occurs when an individual sells or trades their cryptocurrency for less than they bought.
Cryptocurrency taxation can be carried out with diverse methods, the most common being the net capital gains, which is the difference between what you paid for your crypto and what you sold it for. However, if you hold onto your crypto for less than a year, you may be taxed at a higher rate.
You can also be taxed on dividends or interest earned from crypto assets. Finally, if you mined crypto or were paid in crypto for goods or services, you will need to report that as income. You’ll then use those numbers to calculate your tax liability with either Schedule D of Form 1040, Schedule E of Form 1040, or an attachment for Schedule C of Form 1040.
How To Calculate your Crypto Gains and Losses
If you bought any cryptocurrency, you might wonder how to calculate your crypto taxes. The first step is to calculate your gains and losses. You can do this by taking your total crypto income for the year and subtracting any losses you incurred. To calculate your taxable income, you will need to consider any capital gains or losses from selling crypto and any income earned from staking or interest on your holdings. To do this, you will need to take into account the following:
- The cost basis of your crypto (i.e., what you paid for it)
- The standard market value of your crypto at the time of sale
- Any fees associated with the sale
Once you have evaluated your gains and losses, you may proceed to file your tax return; again, the process is fairly simple.
How To Calculate your Crypto Tax
For tax purposes, cryptocurrency is considered an asset. Therefore, when you sell or trade cryptocurrency, you are subject to paying taxes on the capital gain. To calculate your tax liability, you will need to know the purchase price (cost basis), sale price, and any fees associated with the transaction.
There are a few methods that taxpayers can use. One method is the first-in, first-out (FIFO) method, which assumes that the first crypto asset sold is the one you purchased first.
Another method is the specific identification method, which allows taxpayers to specify which crypto assets were sold. With this method, taxpayers must keep detailed records of each crypto transaction they participate in to correctly identify which coins should be taxed when calculating their capital gains.
Taxpayers who make multiple trades throughout the year may split their trades into separate parts so they don’t have to deal with this headache.
There are a few different ways that you can go about calculating your crypto taxes. The most important thing is to be accurate and honest - under-reporting or omitting information could result in hefty penalties from the IRS.
How To File your Crypto Tax
The first step is calculating your crypto gains and losses as outlined earlier, and the next step is filling out the crypto tax Form 8949.
The IRS Form 8949 is used to record cryptocurrency capital gains and losses. Each cryptocurrency sale throughout the tax year is documented on Form 8949. When filing your taxes, you must document other non-crypto assets on separate Form 8949s.
Form 8949 is included with Schedule D of Form 1040, which details your total capital gains and losses. You must individually enter your totals for short-term and long-term capital gains and losses on this form, as they are subject to different crypto tax rates.
Next, report the totals from your crypto 8949 on Form Schedule D and any other crypto taxable income on the 1040 Schedule 1, with the exception of earnings accrued from self-employment. In this case, use Schedule C. After that is done, complete the rest of your tax return, file, and pay your taxes.
You have just finished your cryptocurrency tax reporting. Once you have completed the remainder of your taxes, you can file and pay your taxes.
Cryptocurrency isn't taxed in all countries and regions; however, if taxed in your region, do ensure to calculate your capital gains and report them to avoid a criminal record. If you are outside the U.S., you may need to make further findings on filing your taxes; however, calculating capital gains is pretty much the same in all countries.