How To Report Cryptocurrency on Taxes

In this comprehensive guide, we outline step-by-step how to fill out and file your tax return for crypto.

Table of Contents

This article is part of TokenTax's Cryptocurrency Tax Guide.

There are 5 fundamental steps involved in reporting crypto on your taxes:

  1. Calculate your gains and losses.
  2. Fill out Form 8949.
  3. Report your totals from Form 8949 on Form Schedule D.
  4. Report any ordinary crypto 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, file, and pay your taxes.

While they 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 and the completeness of your recordkeeping. In this guide, we'll go over the basics of the major steps, as well as direct you to other resources that get into the specifics of each.

Step 1: Calculate total capital gains and losses

Every time you sell, trade, swap, or otherwise dispose of a crypto asset, you experience a 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 or brokerage fees.

It is just as important to your crypto capital losses as your gains because they may significantly reduce your tax liability in current or future tax years.

For indiviudal transactions in which cost basis is known, these calculations are relatively easy. However, calculating cumulative gains and losses often becomes more difficult as the volume of trades increases and/or you discover you've traded assets whose cost basis was unknown. In these cases, crypto tax software is a very valuable tool.

Step 2: Complete Form 8949

The Form 8949 is the tax form used to report cryptocurrency 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.

For step-by-step instructions on how to fill out Form 8949, visit our Guide to IRS Form 8949 for Crypto Taxes. If this process seems overwhelming, don't worry—crypto tax sotware like TokenTax will automatically fill out the entire form for you.

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 separately for short term and long term capital gains and losses.

2021 Schedule D

The Schedule D also includes gains and losses from Schedule K-1s from businesses, estates, and trusts of which you are a part. It also is where you will report 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.

This 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 langauge 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."

2021 1040 Crypto 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.

You may be self employed if you have a crypto mining operation, particularly if you want to deduct mining expenses from your income.

If your crypto income activities constitute self employment, 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 self-employment tax. Self-employment tax accounts for the Social Security and Medicare taxes usually withheld from employee paychecks.

2021 Schedule C Form 1040

You may be able to deduct expenses from your self employment income. For example, if you have a mining operation, it’s possible to deduct expenses of 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 the crypto portion of your tax returns. Once you complete the rest, you or your crypto tax accountant will be ready to file.

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