How to Report Crypto on Your Taxes: Filing Form 8949 & More
In this five-step guide, we outline how to report cryptocurrency on taxes and file crypto tax forms, such as Form 8949.
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There are 5 fundamental steps to reporting cryptocurrency on your taxes:
Fill out crypto tax Form 8949.
Report the totals from your crypto 8949 on Form Schedule D.
Report any ordinary crypto taxable income on the 1040 Schedule 1, unless your earnings are from self employment. In this case, use Schedule C.
Complete the rest of your tax return, file, and pay your taxes.
While there may only be 5 tasks listed, don't be fooled: each one can take quite a lot of time and energy, depending on the volume of your transactions, whether you use crypto tax software, and the completeness of your record-keeping. In this guide, we'll go over the instructions for each step.
Step 1: Calculate total capital gains and losses
Every time you sell, trade, swap, or otherwise dispose of a digital currency, you experience a crypto taxable event, and therefore realize a capital gain or loss.
To determine how much your gain or loss is, you need to 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 transaction, brokerage, or ETH gas fees.
It's just as important to calculate your crypto capital losses as your gains because they may significantly reduce your tax liability in current or future tax years.
For individual transactions for which cost basis is known, these calculations are relatively easy. However, calculating crypto gains and losses often becomes more difficult as the volume of trades increases and/or you discover you have missing cost bases. In these cases, crypto tax software is a very valuable tool.
Step 2: Complete Form 8949
The IRS Form 8949 is the tax form used to report crypto capital gains and losses.
Each sale of crypto during the tax year is reported on the 8949. If you had other non-crypto investments, they need to be reported on separate Form 8949s when you file your taxes.
Here are 8949 instructions:
First, fill in the initial information at the top of the tax Form 8949. For the short term trades section, you will need to select check box A, B, or C 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 wasn’t reported to the IRS
(c) Short-term transactions not reported to you on Form 1099-B
You will most likely select check box C, as exchanges typically do not provide crypto 1099s. However, if an exchange has provided you a 1099-B, you will want to check A or B.
You will then need to organize your calculations row by row, including the details of each transaction:
Description of property: This describes the asset that was sold, exchanged, or spent. For example: 1.5 BTC
Date acquired (MM/DD/YYYY): This is the day you purchased the crypto asset that you are using as your 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 crypto.
Adjustment, if any, to gain or loss: This code describes the adjustment amount you enter in column G. Typically, you will not have any adjustments, but the IRS lists capital gain adjustments in their instructions if you need them. For example, you may need to make adjustments if you received a Form 1099 without 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, you will 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.
The example below shows a completed Form 8949 of short term sales of ETH, ZEN and ELF.
Next, you need to 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: Typically, you will not have any adjustments. If you do have adjustments, the total would be reported here without any accompanying description.
Total Gain or (loss): the sum of your transaction capital gains or losses.
If you were trading large volumes of crypto, your cost basis and proceeds totals may seem larger than you expected. This is normal, as they are the sum of all cost basis / proceeds. For example, you could trade $10,000 of BTC back and forth multiple times with little gain or loss and still have a large amount of total cost basis / proceeds.
Afterwards, you will repeat the same steps to populate the information for your long-term trades in Part II of Form 8949.
Step 3: Include Form 8949 with the Form 1040 Schedule D
The Form 8949 is included with the Form 1040 Schedule D, which reports your overall capital gains and losses. On this form, you list your totals for short-term and long-term capital gains and losses separately, as they receive different crypto tax rates.
The Schedule D also includes gains and losses from Schedule K-1s from any businesses, estates, and trusts. It also is where you will report crypto capital losses carried forward from previous years or those that you wish to carry forward to future years.
Step 4: Report crypto income
Ordinary income on Form 1040 Schedule 1
Although crypto profit is often reported as capital gains, there are instances where it is recognized as ordinary income. These include crypto mining and staking, hard forks and airdrops, and crypto lending interest.
Crypto income is reported on Form 1040 Schedule 1.
At the top of the form, it asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” This was a slight tweak from the language on the 2020 Form 1040, which asked ""At any time during 2020, did you receive, sell, or otherwise acquire any financial interest in any virtual currency?" Many interpreted this question as indicating that even purchasing cryptocurrency with fiat had to be reported.
In addition to clarifying the language on the form, the IRS amended its crypto FAQ page to note that "if your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question."
Total crypto income that you’ve received personally (i.e. not as a self-employed person) is included in the Form 1040 Schedule 1 “Additional Income and Adjustments to Income” on line 8 "Other income."
Crypto tax software will calculate this total from your transaction history, so you’ll know exactly how much income you need to report on your Form 1040 Schedule 1.
Self-employment income on Form 1040 Schedule C
You are self employed if you conduct business as a sole proprietor, independent contractor, member of a partnership, or are otherwise conducting business for yourself. Many crypto miners are considered self employed.
If you're self employed, then instead of reporting income on Form 1040 Schedule 1, you’ll need to put that income on a Form 1040 Schedule C and pay crypto self-employment tax. Self-employment tax accounts for the Social Security and Medicare taxes usually paid by an employer/withheld from employee paychecks.
You may be able to deduct expenses from your self-employment income. For example, it’s possible to deduct crypto mining expenses like your equipment and electricity bill (if metered separately).
You may also be able to deduct expenses if you’ve used your home for this hypothetical mining operation, i.e. you’ve devoted a whole spare room to the mining rigs. In this case, you can refer to Form 8829 “Expenses for Business Use of Your Home.”
Step 5: Complete your return
At this point, you've completed your cryptocurrency tax reporting. Once you complete the rest of your taxes, your crypto tax accountant will be ready to file and you can pay your taxes.
Learn more about crypto taxes basics in our Crypto Tax Guide.
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