How to Report Cryptocurrency on Taxes

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

Sponsored By

With 1 in 10 people trading some sort of crypto in the U.S. in 2021, the number of people who own Bitcoin or Ethereum has dramatically increased over the last ten years. But with this rise in popularity comes an increase in questions, especially those regarding legal requirements. One common question is, how do I report cryptocurrency taxes?

Invest In Crypto for Retirement

2187 Reviews
Learn how you can invest in cryptocurrency as part of your retirement plan using the self-trading platform iTrustCapital.

Let’s look into how crypto should be reported in the U.S. 

Do You Have to Report Cryptocurrency on Your Taxes?

The short answer is yes. When you are selling or even just holding your cryptocurrency, it’s important to keep in mind that virtual currencies are considered assets for tax purposes, just like stocks or bonds, so they need to be accounted for to calculate your taxable income. This means that your digital assets are taxed just like stocks and bonds, all of which are capital assets.

For all of these assets, a capital gains tax is levied on increasing the value of capital assets when you sell them. This means that a portion of the increase in value is taxed as income (though the exact rate may be slightly different, as discussed below). Alternatively, because of the dynamic nature of crypto, you may also have experienced a loss. You will not be subject to taxes in this situation, though you should keep an accurate record of the changes in the value of your holdings to confirm this.

Depending on how long you’ve held your crypto, the tax treatment differs. If you held it for less than a year, the amount you gained on it will be considered “short-term” for taxation purposes. Short-term holding and selling of an asset results in a tax rate equal to your annual income tax rate since selling that currency effectively benefits your income for the year. After a year of holding your crypto, selling it counts towards your “long-term” income that’s taxed at a much lower rate than your income. You can pay as little as 0% of your income as tax. Your income level determines how much you pay, and the exact figures can be found on the IRS’s official website.

What Can Happen if You Don’t Report Cryptocurrency on Your Taxes?

Failing to report your crypto earnings and holdings accurately is illegal and comes with several possible consequences; for incorrect information on your tax records, you can face legal ramifications. 

You’re likely to face, in the event of an IRS audit finding poorly maintained information or deliberately misleading records, penalties, interest, and even criminal charges. In extreme cases, you could face convictions for fraud or tax evasion, depending on the value and duration of your crypto wrongdoings. Tax evaders can face up to five years in prison and $250,000 in fines. 

How to Report Cryptocurrency on Your Taxes

The most important thing you should do when thinking about keeping records of your crypto tax documentation is to collect everything. It’s vital that, when needed, you’re able to recall all of the taxable cryptocurrency transactions that occurred in the previous year and sometimes in the years before. 

Here’s how to report crypto on your taxes: 

1. Calculate Capital Gains and Losses

First, you have to calculate how much you’ve made or lost on buying and selling crypto over the past year. This requires checking the initial value of any crypto you purchased and then comparing it to the value you sold it at. This difference is a capital gain or loss. 

You should take great care at this step to ensure that you’ve accurately completed the calculation so that you don’t record incorrect information on your tax forms. 

Invest In Crypto for Retirement

2187 Reviews
Learn how you can invest in cryptocurrency as part of your retirement plan using the self-trading platform iTrustCapital.

2. Complete IRS Form 8949

Next, you have to fill out IRS Form 8949, which assesses the amount you’ve earned on capital goods that have changed hands, and cryptocurrency is part of this group. On this form, you’re required to record the results of your transactions in which you bought and/or sold crypto throughout the year. 

This form is used for recording all capital goods and capital gains income, so any other income you received from selling capital goods should also be present on Form 8949. 

3. Include the Totals from IRS Form 8949 on Schedule D

After step 2, you need to prepare your IRS Schedule D. This is an official IRS document that helps you calculate the amount of tax you’re required to pay based upon your capital gains earnings or losses in the past year. On this form, you should carefully include the final totaled figures from Form 8949. Ensure you fill out all necessary sections of Schedule D with the relevant numbers that you calculated earlier. 

4. Add Any Income from Cryptocurrency

Then, in Schedule D, you’re also required to list any income you’ve received from the cryptocurrency over the past year. There are various types of income that you can receive from owning cryptocurrency, including: 

  • Staking
  • Lending
  • Cloud mining
  • Any other form of income generated by the cryptocurrency that you held for at least a portion of the previous year

Ensuring you include all types of income you received through cryptocurrency on Schedule D is critical to ensure that your tax records are all official and correct. 

5. Fill Out the Rest of Your Tax Return

Finally, using the rest of the information about your total income for the previous year, capital gains, or otherwise, complete the remaining sections of your tax forms for the year closed. 

Open a Crypto IRA Account to Save on Taxes

The IRS has heavily regulated the legal requirements for and of crypto assets and their taxability based on the legislation surrounding crypto transactions; crypto holders cannot claim tax exemptions under regular crypto transactions.

Although, there is a way of reducing the amount of tax you are required to pay to the IRS by opening up a crypto IRA and depositing your crypto assets into it. Because Individual Retirement Accounts hold your savings for an extended period of time, they also provide a tax benefit that encourages leaving your finances in to earn greater rewards in the long run. 

A crypto IRA provider, such as iTrustCapital, usually allows you to move your current savings over to the digital platform and add new savings when wanted. This allows you to have your savings exposed to the possible benefits of the crypto market and therefore is suitable for investors looking to make the most of their stored savings. iTrustCapital is one example of the safe options for a crypto IRA, being a SOC 2 Type II security, which allows you to have confidence that your finances will still be accessible in the future when needed. 

If you want to learn more about iTrustCapital, click here to visit their website.

iTrustCapital

You may also like

Roth IRA and 401k accounts help with retirement, but each has its pros and cons. Is it possible to have both? We’ll share the answer.
Read more

Advertisement Disclosure

Product name, logo, brands, and other trademarks featured or referred to within Banks.com are the property of their respective trademark holders. This site may be compensated through third party advertisers. The offers that may appear on Banks.com’s website are from companies from which Banks.com may receive compensation. This compensation may influence the selection, appearance, and order of appearance of the offers listed on the website. However, this compensation also facilitates the provision by Banks.com of certain services to you at no charge. The website does not include all financial services companies or all of their available product and service offerings.