Last Updated on December 16, 2022 by Ben
If you own Bitcoin and other cryptocurrencies, it is important to keep records of your holdings for tax purposes. The first thing is understanding what qualifies as a taxable event.
A taxable event occurs when cryptocurrency is converted into any other form or traded on an exchange. You must also record every time that cryptocurrency was given as payment for goods or services rendered.
Table of Contents
- What are the Tax Implications of Bitcoin Transactions?
- What Records Do I Have to Maintain for Bitcoin Transactions?
- Tax Guide for Crypto and Bitcoin in the U.S.
- How to Prepare and Report Crypto Tax Filing
- How To File Your Bitcoin Gains and Losses With Your Taxes
What are the Tax Implications of Bitcoin Transactions?
Considering Bitcoin is charged as property, you have to record every purchase and pay taxes on the variance between the buying and selling prices. This is especially important now that Tesla accepts Bitcoin for their vehicles.
Bitcoin has gone up in value a lot. If you have Bitcoin a year ago, paid $5,000 for it, and then you sell it for $45,000 worth of cash, that is a $40,000 gain on the sale, which is the difference between what you sold it for and what you bought it for. Short-term capital gains are taxed as income. If you sell your house or other property, the money you get from that sale is called a capital gain. The tax rate for short-term capital is different from the tax rate for long-term capital gains.
This tax treatment with Bitcoin is different from the way it would work with cash. In a cash transaction, you have to recognize a gain on the purchase. Even though cash can shift in value, currency fluctuations do not trigger gains or losses in the same way property does.
What Records Do I Have to Maintain for Bitcoin Transactions?
For a Bitcoin investor to successfully maintain their records, they need to track the purchase price of the Bitcoin (i.e., the price of Bitcoin when it was bought) and the price when it is sold, exchanged, or used to buy something else.
Some people who use Bitcoin may receive a form 1099 from their broker at the end of the year. But it is up to you to report if you received from 1099. Form 1099 will track how much money you got from selling Bitcoin, but not your tax balance.
If you have not received a form for taxes on your Bitcoin transactions, you will need to keep track of all the Bitcoins that you have sold or exchanged. The amount you get when you sell Bitcoin will be your gross “sales proceeds.” Then, add up the price of the Bitcoin that you bought for this money, and subtract that from what you got. That will be the taxable gain.
Tax Guide for Crypto and Bitcoin in the U.S.
Determine If You Owe Crypto Taxes
Here are some of the taxable crypto events:
- Selling crypto for crash
- Paying for good service
- Buying one crypto with another crypto
- Receiving mined crypto
- Being paid in crypto or by airdrop
- Receiving crypto rewards
Transactions should be reported at their fair market value. For example, if you bought a pizza with bitcoins, you would have to report the bitcoin as the cost of the pizza (the fair market value) in dollars.
Airdrops and Tax Implications
If you got free cryptocurrency when it was airdropped, what you do with your cryptocurrency will affect how it is taxed. Airdrops are a lot like when you get free money in a lottery or giveaway. They should be taxed as ordinary income, and the value on the day you received them should be how much they are worth.
If you have crypto in your wallet, but Coinbase has not started using the protocol, then the crypto is not taxable. When you can transfer, sell, exchange, or otherwise do something with crypto received in a fork, then it becomes taxable.
What’s Not Taxable
Some things that are not taxed are:
- Donating cryptocurrency to a qualified tax-exempt charity or nonprofit is the best way of getting it back into circulation.
- Buying crypto on the street with money and holding it.
- Transferring crypto between Coinbase accounts or from an external wallet to a coinbase account
Calculate Gains and Losses
Now that you see everything you have done, it is time to figure out which transactions had losses and which had gained. This means reviewing each transaction and seeing if the cost basis is a loss or again.
In the United States, you can use losses to offset gains. You can also deduct up to $3,000 in losses from your income. This means that you might not have to pay tax on the loss if you lose money on crypto.
Consult a Tax Professional
Investors are go-getters and DIYers. This means that they pay taxes on bitcoin and other cryptos, but it is complicated, and people should consult a qualified tax professional when they are unsure about the rules. Coinbase is not a company that provides tax advice. If you want to know about taxes, you will need to talk to someone else.
There have been quantities of uncertainty in the past few years because people don’t understand taxes. This is an educational guide that will help you understand taxes. We hope it helps, but we cannot replace a tax professional when it comes to giving you more attention to your unique situation.
Prepare your Forms
Here are the forms you may want to learn about.
You may need these forms.
- Form 8949: Fill out this form if you have a transaction that should be considered to have a capital gain or loss. Fill it out based on your transactions from various exchanges.
- Form 1040 Schedule D: Is a list of your capital gains and losses. It is called Schedule D because, on the back of it, there are four different types of schedules that summarize what you have done.
- Form 1099-MISC (Miscellaneous Income) This form is used to report money that you made from rewards and other programs. You need to fill this out if you earn $600 or more in a year.
File Your Taxes
You have your papers ready to be filled in, and you know what happens when people buy and sell things. You also asked a teacher that helps with taxes. Now you need to fill in the forms. If you’ve done your taxes, then you’re probably ready. But it’s always good to double-check with an expert one last time.
How to Prepare and Report Crypto Tax Filing
Step 1: Assemble the information for Bitcoin tax reporting
- You need to know all the following things for each transaction:
- How much money you spent on buying the cryptocurrency.
- The date you purchased the crypto
- The date you trade or exchanged the coins
- The amount of money the cryptocurrency was worth when you sold it or the value you received in exchange.
When you sell stocks, your broker will send you a Form 1099-B that tells you about the sales for the year. You need this information to report on your taxes. But don’t believe that cryptocurrency exchanges will give you the same service as a bank. Most crypto platforms or exchanges only send 1099 forms to customers who have earned more than $20,000 or more than 200 transactions involving cryptocurrencies during the year.
You can generate reports through your cryptocurrency exchange platform. That will include all of the buys, sells, sends, and receipts of cryptocurrency from the account. If all of your crypto transactions take place on one exchange, it will be easier to gather the information you need for taxes. If you have cryptocurrencies in several places, you will need to download reports from each of them.
Step 2: Compute your Bitcoin gains and losses.
Once you have all of your cryptocurrency information for the year, you need to decide if you made a purchase that resulted in a gain or a loss on each transaction. To do this, you’ll need to decide how to measure the value of the cryptocurrencies you sell. Your options are:
- First-in-first-out (FIFO). The coins you buy first will be the ones you sell first.
- Specific identification. You can choose which coins you are getting rid of in each transaction.
The method you choose can affect how much taxes you owe in a particular year.
If you buy 100 coins at $1 each on January 1, 2021, and buy another 100 coins at $20 each on June 1, 2021. On February 1 of the next year, you sell 40 of them for $15 each.
Using the FIFO method means that you can find out how much money you have made from selling 40 coins. You would get $560. This is 40 coins at $15 each less 40 coins at $1 each, or $600 – $40 = $560.
In the specific identification method, you can decide that four coins sold in February of 2022 came from a lot purchased in June of 2021. If this is true, then you would have a short-term loss of $200. This is 40 coins at $15 each, minus 40 coins at $20 each. That’s a difference of $600-$800.
The reports that some cryptocurrency exchanges provide are not specific. They might have a gain/loss report, but it will be on the FIFO method. That means you can’t use the specific identification method if you rely on them.
Step 3: Report your Bitcoin transactions.
Capital gain transactions are reported on IRS Form 8949. The form is divided into two sections:
- Cryptocurrencies you hold for a year or less are in the short-term section. Short-term gains are taxed just like an ordinary income.
- Cryptocurrencies that are held for one year and more get put in the long-term section. Long-term gains qualify for the more favorable long-term capital gains rates, which cap out at 20%.
On the 8949, include your totals from Form 8949. If you sold other investments, report those on a separate Form 8949. Carry the totals from all 8949 forms to IRS Schedule D.
How To File Your Bitcoin Gains and Losses With Your Taxes
If you have your Bitcoin for more than a year, you have to pay tax on it. The tax you will pay is based on your income. Single filers have a different tax rate based on how much money they earn each year. If you make less than $40,000 per year, the tax rate is 0%, and if you earn more than $441,450 per year, the tax rate is 20%. You can use this IRS tool to help calculate your taxes.
The IRS ordered Coinbase to give them information about more than 14,000 people who had bought, sold, received, or sent bitcoins between 2013 and 2015 (BTC) for more than $20,000.
People who thought Uncle Sam was going to look at whether people paid taxes on bitcoin transactions were right. On July 26, 2019, the federal government said they would send 10,000 letters to taxpayers that they think “potentially failed to report income and pay the resulting tax from virtual currency transactions or didn’t report their transactions properly.”
The rules for cryptocurrency losses are similar to the rules for tax on stock investments. You can utilize your losses to reduce your capital gains. If you have any losses left over, you can deduct them from other kinds of income. For example, if you make $4,000 and spend $3,000 on taxes, that leaves you with only.
A digital currency, like Bitcoin, can be traded for goods or services and has become increasingly popular in recent years. However, the IRS does not regulate it as an official currency, so there are no set guidelines for reporting bitcoin trading activity under tax law.
It’s important for citizens to maintain records of their dealings with Bitcoin because this lack of regulation means they may face scrutiny from the IRS if reported income doesn’t match up with what was actually earned by selling bitcoins at various points over time – such discrepancies could result in high penalties!