Filing cryptocurrency taxes can be complicated. There is a lot of confusion in regards to regulation in this emerging market. More often than not, tax payers are left with more questions than answers when trying to resolve their tax complications.
Even though the IRS has given very little guidance on crypto tax requirements, it has been pressing investors to file on time. The Internal Revenue Service has subpoenaed users’ information on crypto exchanges, formed bodies to investigate blockchain transactions, and even sent letters directly to tax payers.
This short guide will show you how you can generate your IRS compliant tax forms and file your cryptocurrency taxes.
Step 1: Understand The Fundamentals
Cryptocurrencies are taxed as property. Meaning they are subject to capital gains tax. This can be either short-term (less than 1 year), or long-term (more than a year). Short-term capital gain has a higher tax bracket than the latter. It is important to note that both, crypto to fiat and crypto to crypto transactions are taxed.
A Cost basis is the original value or purchase price of an asset. There are several accounting methods to consider. FIFO (first in, first out), HIFO (highest in, first out), LIFO (last in, first out), and many others. The IRS allows users to freely choose between any accounting method, so long as it is consistent across all the years.
To accurately calculate your taxes, you’ll need your entire cryptocurrency transaction history. This is needed to create Form 8949 (sale of capital assets). Which will then be used to create Form 1040 Schedule D (total capital gains from crypto, stocks, and other assets).
Here’s the process overview:
Cryptocurrency Transactions ⟶ Form 8949 (sale of assets) ⟶ 1040 Schedule D (total capital gains).
Step 2: Calculate Your Cryptocurrency Tax
There are 3 main ways you can calculate your taxes and generate Form 8949. You can either do it manually, use an automated service, or hire a CPA. Each method varies in cost and effort required.
a. Manual Calculation
If you have a small amount of transactions, you can manually calculate your capital gains tax. For example:
1. You buy 1 BTC on January 1st, 2019 for $5,000
2. You sell 1 BTC on November 1st, 2019 for $8,000
3. You paid a total of $13 in fees for the transactions.
You can simply subtract $8,000-$5,000-$13, which equals $2,987 in capital gains. Because the hold duration was less than one year, it should be labeled and taxed as a short-term capital gain.
b. Tax Preparation Software
If you have more than a few transactions, it can be tricky to manually calculate your taxes. Instead, you can use a tax software that crunches the numbers and generates the files for you.
Most cryptocurrency tax softwares allow users to simply import their transactions via API or CSV. Your capital gains are then calculated using different cost basis methods to see which one created the lowest tax bill.
Your files are then generated and typically include:
- Form 8949
- TurboTax and TaxACT exports
- Transaction History
- Capital Gains Summary
- Income Report (for airdrops, payments, etc…)
The reports are compatible with online filing services, as well as traditional filing methods. Prices generally start as low as $29, and can go up to $249 for a large number of transactions.
c. CPA
If you have major audit concerns, have been contacted by the IRS, or have a complex tax return, then hiring a CPA might be worth the cost. You should expect to pay anywhere from $499 to $1999 for full service filing.
It’s important to remember that some accountants might be in the dark just like you. The IRS has provided minimal guidance on cryptocurrency taxes. Therefore, finding a CPA with cryptocurrency experience is important.
Step 3: File Your Taxes
After calculating your capital gains from your cryptocurrency transactions, you should now be able to correctly file your taxes. There are 2 main ways you can do this.
a. Filing via Tax Platforms
If you use an online tax filing service like TurboTax, you’ll need to upload your capital gains summary. This can be done by manually entering your individual asset sales, or by importing your files.
If you’ve used a crypto tax preparation service, then you will have an export file that you can simply upload to TurboTax or TaxACT.
It’ll then automatically populate your Form 8949, and pass that information to your 1040 Schedule D.
b. Filing via a Tax Accountant
If you are filing your taxes traditionally, then you’ll need Form 8949. This can either be filled out manually, or downloaded from the cryptocurrency tax platform you’ve used. You’re CPA will then use that to transfer your gains to Form 1040 Schedule D.
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