It is officially tax season in many countries throughout the world—the United States included. This means that millions of people are taking the time to get their documents and investments for tax reporting, including their cryptocurrency. In this guide, we walk through five commonly asked questions about cryptocurrency tax to help you gain a better understanding of crypto-assets taxation.
Note: This guide breaks down specific cryptocurrency tax implications within the U.S., but similar issues arise in many other countries.
Table of contents
1. How are cryptocurrencies taxed?
According to the Internal Revenue Service, cryptocurrencies such as Bitcoin are treated as property for tax purposes, not as currency. Therefore, capital gains and losses reporting rules that apply to other forms of properties like stocks, bonds, and real estate, also apply to your cryptocurrencies.
To be clear, you do not owe taxes just for holding crypto. You only pay taxes on the income that is generated from your crypto investments. Let’s walk through an example.
An example of how to calculate tax on Bitcoin
John buys $500 of bitcoin. Two months later, John sells his bitcoin for $750. In this simple example, John has a $250 capital gain from the sale of his bitcoin. This capital gain is a form of income. John reports this on his tax return, and he pays a percentage of tax on that $250 gain.
2. When do I trigger a tax reporting requirement for my crypto?
As mentioned above, only buying and holding cryptocurrency is not taxable. To understand when it is that you need to be reporting your crypto on your taxes, you need to understand taxable events.
A taxable event refers to any activity that results in a tax consequence for the party who executes the transaction.
In the world of cryptocurrency, you incur a taxable event when you do any of the following:
- Sell crypto for fiat currency
- Trade crypto for another cryptocurrency
- Use cryptocurrency to purchase goods or services
- Earn cryptocurrency as a form of income
If you have incurred any of the above, you have a tax reporting requirement for your bitcoin and cryptocurrency.
3. How do I report cryptocurrency taxable events on my taxes?
In the United States, capital gains and capital losses are reported directly on IRS Form 8949. You should list each cryptocurrency disposition (taxable event) on Form 8949.
To do this, you need to include a description of the property you are selling, the date you acquired the crypto, the date you sold or traded it, the proceeds from the trade (in USD), your cost basis in the asset (in USD), and the gain or loss realized from the disposition (sale or trade).
Once you’ve listed each sale, trade, or other disposition on Form 8949, you add up all of the gains and losses for each entry to arrive at a net capital gain or loss. This number is reported at the bottom of the form.
Once you have your net capital gain or loss, you transfer that to Schedule D and include 8949 with your tax return. Today, many crypto tax calculators exist to generate your cryptocurrency tax forms like 8949 for you.
4. Can my losses reduce my taxable income?
Both your losses and gains are required to be reported fully on Form 8949. Many traders believe if they only have losses, they do not need to report; however, this is inaccurate.
The silver lining is that losses incurred from crypto trades and sales reduce your taxable income. Therefore, it means you will have a smaller overall tax bill (or get a larger tax refund) by including your cryptocurrency losses with your return.
5. Why can’t my exchanges help me with tax documents?
Crypto exchanges can not provide accurate tax documentation to their users because they don’t know at what price users bought the cryptocurrency when it first came on to their platform and at what price users will sell that cryptocurrency when it is gone from their platform.
For example, a user buys Bitcoin through Coinbase and then send it to a Binance’s bitcoin wallet address to and sell it there. Here Coinbase doesn’t know when, how and where and what price user is going to sell his bitcoin. Similarly, Binance can’t know the buying related information about those Bitcoins.
Therefore, it means that anytime you move crypto-assets to or from an exchange like Coinbase, the exchange can’t help you with tax information that you need for capital gains and losses reporting, which is an essential piece to figure out your capital gain or loss.
To solve this problem crypto tax calculators aggregate all of your cryptocurrency data across multiple platforms so that you can build your holistic tax reports.
Let us know if you have any tax-related questions about your cryptocurrency investments in the comment section.