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How to Report Crypto On Your Taxes: 5-Step Guide

Andrew Perlin
ByAndrew Perlin, CPA Reviewed byArthur Teller, CPAUpdated on December 21, 2022 · minute read

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  • While planning how to report crypto on taxes, be sure to claim all crypto capital gains and losses on Form 8949 and Form Schedule D.

  • You should include ordinary crypto taxable income on the 1040 Schedule 1, or Schedule C if your earnings come from self-employment.

  • If you are a U.S. taxpayer, you need to attach each of these forms to your Individual Income Tax Return Form 1040 by April 15, 2023.

Do I need to report crypto on taxes?

The IRS requires that you report all sales of crypto, as it considers cryptocurrencies to be property. 

Trading, selling, swapping, or disposing of crypto in any way constitutes a taxable capital gain or loss. Earnings derived from crypto mining, staking, and most yield farming are taxed as income.

How much crypto do I need to report to the IRS?

You owe taxes on any amount of crypto profit or income you generate, regardless of whether or not you receive tax documents. 

Bear in mind that crypto exchanges send Forms 1099-MISC to traders who earned more than $600 through crypto rewards/staking and to the IRS. To learn more about the IRS’ increased tax audits and enforcement, read our page “Does Coinbase Report to the IRS?”.

The Infrastructure and Investment Jobs Act that the Biden administration signed into effect in November of 2021 will require cryptocurrency exchanges to issue a 1099-B beginning in 2023. 

However, exchanges do not necessarily know the cost basis (the amount a trader originally paid for the asset). This means that keeping close track of your cost basis will be more important than ever to ensure accuracy in your tax return [1]

With TokenTax’s crypto tax software, you can quickly and easily:

  • Keep track of your cost basis

  • Calculate your total crypto income from your transaction history

  • View your crypto taxable events and apply one of numerous crypto accounting methods to minimize your tax liability.

To speak with our team about a crypto tax software plan that will support your crypto data, please contact us at  [email protected]

To learn more about TokenTax and our plans, visit https://tokentax.co/pricing.

Do you pay taxes on lost or stolen crypto?

The IRS does not provide comprehensive guidance surrounding the taxation of stolen or lost crypto, but you could qualify for a tax exemption if you declared crypto loss/theft an investment loss. We highly recommend consulting your crypto tax advisor before deciding on a strategy for reporting your losses.

You can no longer claim crypto as a casualty loss on Form 4684

There are three classifications that crypto loss may fall under: casualty loss, theft loss, and investment loss.

The IRS states that “a casualty loss “can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty doesn't include normal wear and tear or progressive deterioration.”[2]

Although prior to 2017 it was possible to deduct various types of casualty losses on Form 4684, the Tax Cuts and Jobs Act[3] (passed in December of 2017) has left little recourse for crypto investors who have been subject to ICO scams

As of the 2021 tax year, scenarios such as rug-pulls (when founders disappear after taking investors’ money) no longer qualify for a deduction on Form 4684. In fact, the only scenario in which you would be able to write off a crypto theft would be one in which you lost crypto due to a federally-declared disaster

Similarly, the most common crypto theft loss scenarios (such as stolen coins, hacked wallets, and hacked exchange accounts) are no longer deductible on Form 4684 as a result of the Tax Cuts and Jobs Act. 

Tax implications of crypto scams and exchange shutdowns

Exchange shutdowns - such as the situation surrounding Bitfront - are a much-debated topic among tax professionals. Some hold that investors can claim losses that result from an exchange shutdown (or a scam crypto project, such as a fraudulent NFT mint) on Form 8949 in order to receive a tax break. Others, however, claim that this scenario would constitute a personal casualty loss and would thus be non-deductible. 

Claiming losses from an exchange shutdown or fraudulent crypto project on Form 8949 would be an aggressive and risky tax position to take. If you have been affected by a scenario of this nature, the best course of action would be to consult your CPA before deciding how to handle your losses.

So, can you claim crypto losses on taxes? Ultimately, the only way in which a crypto loss or theft would qualify for a tax exemption would be by declaring it an investment loss. You can learn more about declaring crypto investment losses in our article "How to Report Crypto Losses".

What are the IRS crypto tax forms?

When learning how to file crypto taxes, it is important to familiarize yourself with the tax forms that will be necessary to include with your return. In addition to the list here, you can view examples of the required forms later in this article.

To report crypto on your taxes you will need to fill out the following forms and attach them to your Individual Income Tax Return Form 1040 by April 15, 2023:

  • Form 8949

  • Form Schedule D 

  • Form 1040 Schedule 1 (1040 Schedule D if your crypto earnings come from self-employment)

Learn how to report crypto earnings on taxes

There are 5 steps you must follow to report cryptocurrency on your taxes:

  1. Calculate your crypto gains and losses

  2. Fill out crypto tax Form 8949

  3. Report the totals from your crypto 8949 on Form Schedule D

  4. Report any ordinary crypto taxable income on the 1040 Schedule 1, unless your earnings are from self employment. In this case, use Schedule C

  5. Complete the rest of your tax return, then file and pay your taxes

Step 1: Calculate capital gains and losses on crypto

Every time you sell, trade, swap, or otherwise dispose of a digital currency, you experience a crypto taxable event and realize a capital gain or loss. 

The answer to the common question “Can you claim crypto losses on taxes,” then, is yes! Crypto capital losses and gains may significantly change your tax liability in current or future tax years.

To determine the amount of the capital gain or loss, you must find the difference between the asset's value at the time of its disposal and its cost basis. An asset's cost basis is the amount for which it was acquired, including any exchange or transaction fees.

Capital gains corrected

Step 2: Complete IRS Form 8949 for crypto

The IRS Form 8949 is the tax form used to report cryptocurrency capital gains and losses.

You must use Form 8949 to report each crypto sale that occurred during the tax year. If you had other (non-crypto) investments during the tax year, you must report them on separate Forms 8949 when you file your taxes.

Report crypto on your 8949

  • Fill in the information at the top of Form 8949. 

  • Select check box (a), (b), or (c) for the short term trades section in Part I:

    • (a) Short-term transactions reported on Form(s) 1099-B, showing basis was reported to the IRS

    • (b) Short-term transactions reported on Form(s) 1099-B, showing basis was not reported to the IRS

    • (c) Short-term transactions not reported to you on Form 1099-B

As of the 2022 tax year, crypto exchanges typically do not provide crypto 1099s. This means that you will most likely need to select check box (c). If an exchange has provided you with a 1099-B, you will check (a) or (b).

Organize your calculations row by row and include the details of each transaction:

  • Description of property: This describes the asset that was sold, exchanged, or spent (Example: 1.5 BTC).

  • Date acquired (MM/DD/YYYY): This is the day you purchased the crypto asset that you are using as the cost basis for the transaction.

  • Date sold or disposed of (MM/DD/YYYY): This is the day you sold, exchanged, or spent the crypto asset.

  • Proceeds: Your proceeds are the gross USD value of crypto sold, exchanged, or spent.

  • Cost basis: Your cost basis is the gross USD value at which you acquired the crypto being sold, exchanged, or spent. This includes purchases in fiat currency or another cryptocurrency.

  • Adjustment, if any, to gain or loss: This code describes the adjustment amount you enter in column (g). Crypto taxpayers typically do not have any adjustments. However, the IRS instructions list capital gain adjustments for use if necessary (if, for example, you received a Form 1099 without a cost basis and need to report your purchase prices to the IRS).

  • Adjustment, if any, to gain or loss: This amount corresponds to the description code you entered in column (f). Typically, crypto taxpayers do not have any adjustments.

  • Gain or (loss): Subtract column (e) from column (d) and combine the result with column (g). This is your net capital gain (or loss) in USD for this particular transaction.

Below is an example of how to report crypto on taxes using Form 8949. This instance shows short term sales of ETH, ZEN and ELF:

Form 8949 filled out with TokenTax crypto tax data

Include your totals in the aggregate boxes at the bottom of the form.

  • Total Proceeds: the sum of your transaction sales prices

  • Total Cost or other basis: the sum of your transaction acquisition prices

  • Total Adjustment, if any, to gain or loss: If you have adjustments, report the total here (no accompanying description is necessary).

  • Total Gain or (loss): the sum of your transaction capital gains or losses

Please note that, if you have been trading large volumes of crypto, your cost basis and proceeds totals may seem higher than you expected. This is normal, as they are the sums of all cost bases and proceeds. 

Repeat these steps to populate the information for your long-term trades in Part II of Form 8949.

8949 Long Term Section

Step 3: Include Form 8949 with the Form 1040 Schedule D

Form 8949 is included with the Form 1040 Schedule D, which reports your overall capital gains and losses. List the totals for your short- and long-term capital gains and losses separately on this form, as they are subject to different crypto tax rates.

2021 Schedule D

Schedule D also includes gains and losses from Schedule K-1s (used in reporting crypto taxes related to dividends, income, or losses if you are a partner in a financial entity or a shareholder in an S Corporation).

If you are carrying crypto capital losses forward from previous years or intend to carry capital losses forward from the current tax year to future years, you must report this on Schedule D as well. 

Step 4: How to report your crypto income

How do I know if I owe taxes on crypto?

If you have received or disposed of cryptocurrency in a given tax year, you owe taxes on that cryptocurrency. Furthermore, if you have earned rewards or payments in crypto, you owe income taxes on this crypto just as you would for ordinary income in fiat.

Luckily, learning how to file crypto taxes for income is very similar to learning how to file income taxes for fiat, and you will use the same forms.

Ordinary income on Form 1040 Schedule 1

Although crypto profit is often reported as capital gains, there are instances in which it is recognized as ordinary income. These include crypto mining and staking,[4], airdrops, hard forks,[5] and crypto lending interest.[6]

Form 1040 Schedule 1 asks, “At any time during 2022, did you (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” 

This clarification of prior years’ questions underscores the fact that the IRS is interested in all crypto transactions - not just sales and swaps.

2022 crypto question

Total crypto income that you have received (with the exception of income you have earned through self-employment) is included in Form 1040 Schedule 1 “Additional Income and Adjustments to Income” on line 8 "Other income."

Self-employment income on Form 1040 Schedule C

A self-employed person - also referred to as an independent contractor - conducts business as a sole proprietor, member of a partnership, or by contracting with a business or trade directly.[7] [8]In independent contracting situations, the payer often does not withhold taxes. As a result, this responsibility generally falls on the self-employed person, who must report self-employment income on Form 1040 Schedule C and pay crypto self-employment tax

2021 Schedule C Form 1040

The IRS distinguishes between earnings you receive as a result of a hobby and those you generated from a business.[9] If the IRS considers your activity to be business- or trade-related, any income or rewards you earn will be treated as self-employment income. 

If you are self-employed, you may be able to deduct expenses from your income. For example, it may be possible to deduct crypto mining expenses (such as your equipment and separately-metered electricity bill) for a crypto mining business. In a case such as this one, refer to Form 8829 Expenses for Business Use of Your Home.

Step 5: Complete your return

You have now concluded your cryptocurrency tax reporting, and this last step includes a few finishing details regarding how to file your crypto taxes.

Complete the rest of your taxes, then your crypto tax accountant will be ready to file. Finally, you can pay your taxes, and this concludes the process of reporting crypto taxes!

What happens if you don’t report cryptocurrency on your taxes?

It is a legal requirement to report cryptocurrency on your taxes, unless you did not realize a capital gain or loss through selling or swapping your assets during the tax year in question. To learn more about how cryptocurrency is taxed, read our page “How is Cryptocurrency Taxed?”.

If you do not report cryptocurrency on your taxes and are found to have had fraudulent intent, you may be subject to 26 U.S. Code § 7201 - Attempt to evade or defeat tax or 26 U.S. Code § 7207 - Fraudulent returns, statements, or other documents

It is important to remember that taxpayers who made a genuine mistake on their return will not be subject to these penalties.

If you were unaware that you needed to report cryptocurrency on previous years’ tax returns, you may be able to amend your returns using Form 1040-X.

Additionally, as of February 2022, taxpayers who are facing criminal prosecution for failing to disclose information regarding virtual currency to the IRS may be able to provide the information on Form 14457 - Voluntary Disclosure Practice Preclearance Request and Application.

It is essential to note that this enforcement of tax penalties in relation to cryptocurrency is unfolding in a rapidly changing space.

According to the IRS Criminal Investigation’s (CI) 2022 annual report, CI will continue to prioritize the tracing, monitoring, and tax basis calculation of cryptocurrency in 2023 to prosecute in instances they deem to be cryptocurrency tax crimes.

CI’s Cyber and Forensic Services announced that “During FY 2022 Digital Forensic lab and field staff took possession of approximately $4 billion of digital currency pursuant to seizure orders.”[10]

Although this example - along with the others cited in the report - are extreme, they are illustrative of the fact that the IRS is investing heavily in the staff and resources necessary to crack down on cryptocurrency tax evasion. It is best to stay on the safe side of crypto tax legislation and report all of your crypto capital gains, losses, and income.

Frequently asked questions 

Do I need to report crypto if I don't sell?

No, you do not need to report crypto if you don’t sell. 

Because cryptocurrency and other digital assets are treated as property, taxable events only occur when you realize capital gains or losses through events such as swapping, trading, selling for fiat, or other methods of disposal.

Will the IRS know if I don't report crypto?

It is reasonable to assume that the IRS will know if you have experienced taxable crypto events and did not report crypto on your taxes for that year.

As of the 2022 tax year, exchanges such as Coinbase report to the IRS. Beginning in 2023, all exchanges will be obligated to provide taxpayers and the IRS with Form 1099-B.

Do I have to report crypto under $500?

You must report all crypto capital gains and losses, as well as earnings, on your taxes. If you realized a taxable event using even $1 of crypto during the tax year in question, you are responsible for reporting it on your tax return.

Can the IRS see crypto accounts?

If the IRS does not already know about a taxpayer’s crypto holdings (as a result of exchanges such as Coinbase reporting to them), recent cases have shown that they may source the information they need in order to prosecute tax evasion through the use of John Doe summonses

It is thus reasonable to assume that the IRS either knows about a trader’s crypto holdings, or could easily learn of them and hold the trader accountable. It is important to learn how to report crypto on taxes in order to avoid IRS penalties, which may be retroactive.

Can I write off crypto losses?

Please bear in mind that there is more than one way to interpret the question “can you claim crypto losses on taxes?”.

The first interpretation of this question pertains directly to lost and stolen crypto. Unfortunately, if someone stole cryptocurrency from you - or if you lost crypto through a mistake counted as “negligence,” such as sending it to the wrong address - you do not have much recourse. 

However, you can write off crypto losses on your tax return if you classify them as an investment loss. This may allow you to deduct from your income or offset your capital gains, which would lower your tax liability. 

To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

Related Content

References

Last reviewed by Arthur Teller, CPA on December 21, 2022 · Sources

Andrew Perlin
Andrew PerlinAccounting at TokenTax
Andrew Perlin is a CPA specializing in crypto taxes. After working as a financial controller, he co-founded CryptoCPAs, which was acquired by TokenTax in 2018.
Arthur Teller
Reviewed byArthur TellerCOO at TokenTax
Arthur came to TokenTax after 12 years at KPMG. A specialist in partnership taxation and enterprise tax software, he is a licensed CPA in both California and Illinois and a member of the AICPA.

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