We are now entering the infamous and nationally dreaded time of the year, known as tax season. With crypto being such a new asset, there may be some confusion or uncertainty around it as it pertains to taxes. Here’s a brief breakdown to help you navigate reporting any gains/losses you may have from crypto when filing your taxes this year.
Crypto brokers such as Coinbase and Binance will be required to file a 1099 form. These forms will be available to their clients, you, as well as the IRS, to ensure you don’t get away with trying anything sketchy.
Understanding The Tax Implications Of Crypto
First, we need to identify what a taxable event is, these are the events that you need to report. Taxable events as they apply to crypto, are selling cryptocurrency for cash, swapping one cryptocurrency for another, earning cryptocurrency, and trading/using cryptocurrency as a medium of exchange for goods or services. There are two tax categories that crypto will fall into, these are Capital gains, and ordinary income.
1. Capital Gains
Capital gains tax will apply to any investing activity, such as Buys, Sells, Trades, and exchanges. There are two categories of capital gains, long-term capital gains, and short-term capital gains.
Short-term capital gains apply to assets that you have held for less than one year and are generally taxed at your ordinary income tax bracket.
Long-term capital gains apply to any assets that have been held for over a year and are taxed at one of three rates, those being either 0%, 15%, or 20% depending on the proceeds.
2. Ordinary income
Ordinary income will apply to any earned crypto, whether it’s through some form of payment, through rewards from staking or mining, or through interest.
Calculating and Reporting
Now that we understand what is taxable and how it will be taxed, we need to pull together all of the transactions and calculate the gains/losses and income in USD terms. If you use a centralized exchange this should be easy because they will be required to provide this information in a 1099 form. However, if you’re using decentralized wallet(s), you will need to aggregate all of your transactions into one place in USD terms, whether that be a spreadsheet or a crypto tax software which will do all of this for you, and then calculate your gains/losses and income from there.
Fill Out Your Tax Forms
Lastly, you will need to Fill out your tax forms, your capital gains and losses are to be reported using tax form 1040 schedule D and form 8949 if needed. You’ll need to fill out the columns with all of your cryptocurrency trades, and sum up your gains and losses, to arrive at a total net gain or loss. Crypto income will need to be reported using Form 1099-MISC.
Click here for a more in-depth crypto tax guide, and always be sure to consult with a tax professional to answer any questions you may have. Happy Tax Season!
