- What crypto transactions are taxable…
- How to calculate what you owe…
- How the IRS is preventing loose reporting…
If you got in on the crypto craze in 2020, today’s the day to make sure you have all your ducks in a row to report that activity to the IRS.
As cryptocurrencies become more mainstream, traders may be unaware of which crypto transactions are taxable and how to report those transactions to the IRS.
But the IRS is trying to make it easy with a simple yes or no question about crypto income.
Right at the top of the 2020 Form 1040, the IRS asks:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Filers can answer that question by simply checking yes or no, but how it will impact your tax return depends on how much you have to report.
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Which Crypto Transactions Are Taxable?
In order for a crypto transaction to be taxable, it has to result in some type of income for the trader.
Let’s use Bitcoin as an example as the number one digital coin saw massive increases in 2020.
If you simply purchased one Bitcoin or a portion of Bitcoin on a platform like Robinhood and let it there and gain value, you don’t owe any taxes on that transaction.
But if you sold off your Bitcoin you must report any profits or losses.
Cryptocurrencies are considered property by the IRS and are taxed as capital gains and losses.
How Taxes are Calculated for Crypto Gains and Losses
How to calculate what you report to the IRS for crypto transactions is the same way you calculate what you report for other assets like stocks and real estate.
The difference between the price you purchased the digital currency for and the price you sold it for is your capital gain or loss.
For example, if you purchased $100 worth of Bitcoin in early 2020 and then a few months later sold that holding for $300, you would report $200 worth of capital gains on the asset to the IRS.
Image credit: Andrey Aboltin/Shutterstock.com
On the other side, if you purchased $500 of Bitcoin and then later sold that holding for just $400, you would report a $100 capital loss.
If total capital losses for the year are larger than capital gains, single-filers can deduct up to $3,000 from total taxable income.
Just like other assets, the amount of time between when you purchase a cryptocurrency and when you sell it impacts how the gains will be taxed.
If you held your Bitcoin for more than a year before selling, it would be taxed as a long-term capital gain.
But if you purchased Bitcoin and then sold it in less than a year, you would have to pay short-term capital gains.
The difference for each of those categories is the tax rate you would pay on the gain.
Short-term gains are taxed at a higher rate than long-term gains.
To calculate what you should report to the IRS yourself you can use Form 8949 to reconcile your capital gains and losses from cryptocurrencies.
Crypto Income Is Taxable Too
Cryptocurrencies are taxed as earned income when you are paid for a service in a digital currency instead of cash, when you earn a token like Bitcoin by mining, or when you earn crypto as a reward from something like Coinbase’s Earn program.
Those earnings must be reported to the IRS based on the U.S. dollar value of the coin at the time it is received.
That means if someone pays you for a service through Bitcoin, you must look up the U.S. dollar value of Bitcoin at the time of that payment and report that number to the IRS at the end of the year even if the value has risen or fallen since.
Guidance from the IRS says, “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”
It’s All Your Responsibility
When it comes to calculating and determining what amount to report to the IRS about your crypto transactions, it’s all on you.
As the holder of the asset, you must keep a record of all transactions and the fair market value of those coins to report at the end of the year.
Some exchanges are now issuing Form 1099-B to help users determine their gains and losses but it’s not common.
There are also a few crypto-focused tax software programs you can use to track your transactions.
CoinTracker, TokenTax, and CryptoTrader.Tax are compatible with traditional tax software like TurboTax, allowing you to easily import your crypto data to include on your tax return.
IRS Steps Up Monitoring of Crypto Transactions
As cryptocurrencies become more mainstream, the IRS is ramping up its ability to crosscheck the gains and income reported by taxpayers.
Earlier this month, a federal judge in the Northern District of California authorized the IRS to serve a summons on the payment platform Circle and crypto exchange Kraken for records of customers who had more than $20,000 in crypto transactions since 2016.
The purpose of that action is to close the loophole of poor user reporting of crypto earnings and more closely align the regulations for crypto with those for stocks.
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