This is a partner post by Erin Fennimore, the Global Head of Information Reporting at TaxBit. She leads the expansion of tax software solutions in emerging and ever-changing crypto markets both domestically and abroad, and helps scale TaxBit’s information reporting.
This material has been prepared for informational purposes only by third party TaxBit, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors to assess your tax strategy and obligations.
Calculating taxes on cryptocurrency can often feel complex and time-consuming in addition to being costly. Here’s some general tax reporting information for crypto transactions, in simple terms.
- There are five important steps to report crypto on your tax returns.
- Not all crypto transactions may be taxable.
- The tax rate on crypto gains may vary relative to the time you hold the assets.
- You may be able to offset your capital gains with capital losses.
How to report cryptocurrency on your tax return
To report your crypto on your tax returns, consider following these five steps:
- Gather a list of all your exchanges and transactions — including any Forms 1099 sent by exchanges
- Calculate your capital gains and losses
- Fill out Form 8949 for all taxable crypto activities
- Transfer totals from Form 8949 form to Schedule D on Form 1040
- Fill out any remaining cryptocurrency income on Form 1040
How is cryptocurrency taxed in the US?
In 2014, the IRS issued Notice 2014-21 to clarify that virtual currency is treated as property for tax purposes; cryptocurrency is taxed as a capital asset and the gain or loss of every taxable event must be reported on Form 8949.
In 2019, the IRS started asking taxpayers about their virtual currency activity on their tax returns. Now, the question appears on the front of the Form 1040 and asks taxpayers “[a]t any time during [the current tax year], did you receive, sell, exchange, or dispose of any financial interest in any virtual currency?”
If a taxpayer checks Yes, then the IRS may look to see if Form 8949 has been filed. If the taxpayer fails to report their cryptocurrency taxes, the IRS may seek to prove intentional disregard.
What tax forms are issued by cryptocurrency exchanges?
Cryptocurrency exchanges usually issue Forms 1099-MISC and 1099-B.
This form provides information for a wide range of income payments such as crypto interest, referral bonuses, and other income. If you’ve earned $600 or more this year in crypto interest or bonuses, the 1099-MISC will be made available by the platform that issued the payments. You’re responsible for reporting the income on Form 1099-MISC when filing your tax return.
Forms 1099-B report transactional information detailing capital gains and losses from disposing of capital assets and cost basis when available. The information on Form 1099-B helps you fill out Form 8949 and Schedule D on Form 1040.
You can download both 1099-MISC and 1099-B forms directly from Okcoin. All you need to do is:
- Log in to your Okcoin account
- Go to the Overview page. You can find it under your profile icon > Overview
- Find 2021 tax forms section
Are all crypto transactions taxable?
No, not every crypto transaction is taxable. The following activities are generally not considered taxable events:
- Buying cryptocurrency
- Transferring like-for-like assets between exchanges
- Gifting cryptocurrency excluding large gifts that could trigger other tax obligations
- Donating cryptocurrency which is tax deductible
What crypto transactions are taxable?
The following crypto activities are generally considered taxable events:
- Selling crypto for cash
- Trading one digital currency for another
- Using crypto as payment
- Mining or staking crypto
- Receiving airdropped tokens
- Getting paid in crypto
All of these activities must be reported even if you experienced a capital loss.
What is the tax rate for crypto?
When it comes to crypto’s tax rate, the US distinguishes between long-term and short-term capital gains.
What are short-term capital gains?
Generally, if you hold a particular cryptocurrency for one year or less your transaction will constitute short-term capital gains. Short-term capital gains are added to your income and taxed at your ordinary income tax rate.
What are long-term capital gains?
Generally, if you held a particular cryptocurrency for more than one year, you’re eligible for tax-preferred, long-term capital gains, and the asset is taxed at 0%, 15%, or 20% depending on your taxable income and filing status.
What is a tax loss carryforward?
The difference between capital gains and losses is called net capital gain. If your losses exceed your gains, you may be able to deduct the difference on your tax return—up to $3,000 in losses per year.
If you have net capital losses for the year that exceed the deductible amount, the IRS may allow you to carry the excess into the next year and deduct it on that year’s return.
How can investors offset capital gains with capital losses?
The IRS generally allows investors to claim deductions on cryptocurrency losses that can lessen their tax liability or potentially result in a tax refund.
Crypto losses must be reported on Form 8949; you may be able to use the losses to offset your capital gains—a strategy known as tax-loss harvesting—or deduct up to $3,000 a year from your ordinary income.
When offsetting your capital gains with losses, pay attention to the holding period of the assets:
- You may be only allowed to offset long-term capital losses against long-term capital gains and short-term capital losses against short-term capital gains.
- Once you’ve offset losses of the same type, you may be able to use either long-term or short-term capital losses against short-term capital gains.
How can TaxBit help?
If you’re overwhelmed by the time-intensive and complex burden of cryptocurrency tax reporting, TaxBit can help. TaxBit allows you to connect your exchanges, wallets, DeFi protocols, NFTs, and more, then download completed tax forms with the click of a button. TaxBit can also provide real-time insights into the value of your portfolio and a chance to optimize tax-loss harvesting strategies.
As a supported TaxBit Network company, Okcoin enables certain customers to receive free Forms 8949 and income reports ready to file with their tax returns. These forms will reconcile to all Forms 1099 issued.