Last Updated on December 9, 2022 by Ben
Bitcoin is the most liked cryptocurrency in the world. What form is needed to file bitcoin taxes? In this blog post, we will talk over how you can report your Bitcoin transactions and pay your Bitcoin taxes with minimal hassle. We’ll go over what forms you may need to fill out for each tax year, what other documents might be required, and how much a typical taxpayer should expect to pay.
Table of Contents
- Bitcoin and Taxes: What You May Not Know
- Step by Step Guide To Filing Your Cryptocurrency Taxes
- The Form 8949 for Cryptocurrency Tax Reporting
- How to Submit Form 8949 via the Form 1040 Schedule D
Bitcoin and Taxes: What You May Not Know
Bitcoin is a new kind of digital money that you can use to pay for things. It is not like the money in your wallet. Bitcoin is made up of small pieces of code, called blocks. You will need to have a virtual wallet to store your Bitcoins and keep them safe.
Bitcoins are a type of money that can be used to buy goods and services. They are just like regular money, but they happen to be digital. Transactions with Bitcoins are anonymous and only tracked with the digital wallet identifiers.
The IRS is not blind to Bitcoin, and in its Notice 2014-21, it says that “convertible virtual currency” is like cash.
The IRS defines convertible virtual currency as virtual money that is worth the same amount as real money. Or it can be used instead of real money.
The IRS says that Bitcoin is like a type of money that you can buy or sell. You can also trade this money for U.S. dollars, which is what real money looks like, or other virtual currencies that you use to buy things with. Virtual currencies do not have the same rights as real currency in the US.
Cryptocurrencies are new investments. They can be complicated to understand. But they are like other things that people buy, like milk or a car. The tax system is old and does not work well to handle these new investments.
If you are selling, exchanging, or using convertible virtual currency to buy something, you might have to pay taxes. The IRS manages convertible virtual currencies as property for tax purposes. If you are paid in Bitcoin, then you need to know how much the Bitcoin is worth. You will need to convert that value into US dollars as of the date you received it and include that amount when figuring your gross income.
Fair Market Value
How would you figure out the fair market value of Bitcoin? David Hryck, a lawyer from New York City, said it could be hard because the Bitcoin price can jump up and down. He said that those changes could be drastic at times. The Bitcoin value is different every day. You need to make sure you convert the value of Bitcoin as of the date you want to pay something in U.S. dollars so that it can be accurate.
It might be hard to keep track of the dates and how much you spent in this world of anonymous payments. “Make sure you take care of records of the dates and value,” Hryck said.
If someone pays you with Bitcoins, you might wonder if it is self-employment income. If a company or individual rewards you in Bitcoins for services you did as an independent contractor, it could be considered self-employment income.
The IRS says that self-employment income includes all gross income from any trade or business you have, other than as an employee. In order for your Bitcoins to be worth money, you need to trade them in for something. Bitcoins are counted as self-employment income when you do this, and therefore, they are subject to self-employment taxes.
Reporting to the IRS
You might have questions about how to file taxes when you sell Bitcoin or other cryptocurrencies.
The basic tax rules that are relevant to property transactions also apply to transactions utilizing virtual currency. The IRS has made it clear that Bitcoin is a type of possession, and your transaction must be reported.
When you sell your cryptocurrency, you should fill out a form called 8949 or Schedule D (1040). These forms tell the government how much money you made from selling your cryptocurrency. If this is your first time doing this, you should talk to an accountant because they will help you to make sure that everything is done correctly.
Failure to Report
What would happen if you didn’t report your Bitcoin or other digital currency transactions on your tax returns? Would the IRS know?
In 2014, the IRS created a notice that had questions and answers about Bitcoin. The IRS realizes cryptocurrencies are not just a passing fad. If you don’t obey any rules or tax laws, you might risk something.
Step by Step Guide To Filing Your Cryptocurrency Taxes
Taxable Vs. Non-Taxable Transactions
If you did not have any transactions that were taxable, then you do not need to file anything about cryptocurrency. However, some transactions that do not involve paying taxes are taxable. For example, if you received a gift, then it is taxable. If you want to know whether the transaction was taxable or non-taxable, just check the virtual currency question on your Form 1040.
Look at your exchanges and wallets. If you see a form, it’s from the tax department. When you don’t see any forms, download the transaction history report. Next, glimpse for a form that looks like our 1099-K or 1099-B with an incomplete cost basis and move on to the next step if you find one.
If you see a Form 1099-B with price basis information, then you can skip the next step of this. Just go to tax filing.
Cryptocurrency Tax Software
Once you have all the paperwork, you can use a computer to find out how much money you spent on buying and selling things. It tells you how much money you made or lost. You will need to give some of it back in taxes. Without this reconciliation, you might not pay enough taxes, or you could be paying too much.
File Taxes With The IRS & State
Once you have found the amount of money that you made from your cryptocurrency and then subtracted the money that you paid in taxes for using it, use software to file your taxes. There will be both federal tax and state tax.
The Form 8949 for Cryptocurrency Tax Reporting
Form 8949 is a form you fill out when you have capital gains or losses with cryptocurrency.
If you buy crypto during the year, it will be part of your taxes. You will need to report it on Form 8949. If you have other investments that are not crypto, then they need to be listed on segregate Form 8949s when you file your taxes.
This is about the Form 8949. This form is for tax purposes, and you will need it if you buy or sell cryptocurrency, like Bitcoin. If this form seems too hard, don’t worry! Tax software can fill it out for you easily.
The first thing you need to do is fill in the information at the top of Form 8949. You will need to choose one of three boxes for Part I: A, B, or C.
- Short-term sales are reported on Form 1099-B. The tax office knows the price.
- Some people reported the sale of their home on Form 1099-B. They did not report how much they sold it for to the IRS.
- Short-term agreement not reported to you on Form 1099-B
Selecting checkbox C will most likely be the best choice for you. Crypto exchanges do not usually give out 1099-Bs. But there is a small chance that you will want to know what to do if they do. You might want to check boxes A or B in this case.
You will need to organize your calculations row-by-row. You will need to write down the details of each negotiation.
- Description of property (Example: 1.5 BTC): This narrates the asset that was traded, exchanged, or spent.
- Date obtained(MM/DD/YYYY): This is the day you bought the crypto asset that you are applying as your cost basis for the transaction.
- Date sold or disposed of (MM/DD/YYYY): This is the day you sold, exchanged, or spent the crypto asset.
- Proceeds: The proceeds are how much money you get from selling or spending.
- Cost basis: This is the value of the money you paid to buy something. It will be different for each person, and it might be in dollars or another type of money.
- Adjustment, When you do your taxes, you might need to enter adjustments. These are changes in the amount of money you have or owe. You will not have any adjustments if they do not apply to you. It is possible to receive a Form 1099 and not know the cost basis. You need to tell the IRS how much you paid for something, but if you don’t know, then use the price listed on the form.
- Adjustments are when you need to change your tax return. You will not have any adjustments if you enter all the numbers in column F.
- The gain or loss is how much money you make or lose from this transaction. Subtract column (e) from column (d). If the number is positive, then that means you won money. If it is negative, then you lost money. Add the result to column (g).
How to Submit Form 8949 via the Form 1040 Schedule D
Fill out Form 8949 with the Schedule D of the form you are filing. This includes Schedule D on Forms 1040, 1040-SR, 1041, 1065, 8865, 1120, 1120-S, 1120-C, 1120-FSC, 1120-H, and certain Forms 990.
When you are filling outlines 1b, 2, 3, 8b, 9, or 10 of Schedule D (Deductible Oil and Gas Income), make sure that you fill out Form 8949 first.
Use Form 8949 to report sales and trading of capital assets. It is very important to fill out this form so that you know how much money you got from selling a house. The IRS needs this information in order to calculate what taxes need to be paid.
If you receive Forms 1099-B or 1099-S, always pass on the proceeds (sales price) indicate on the statement in column (d) of Form 8949. If Form 1099-B shows that the cost or other basis was reported to the IRS, always report the basis. If you need to form a correction or change, do it on this page.
Forms 1099-B can tell you about the amount of money that you spent on stocks, bonds, and other investments. If all Forms 1099-B show that you reported the correct information to the IRS, then you do not need to file Form 8949.
Suppose you received a Schedule A to Form 8971 for property, and Part 2, column C, of the Schedule A says that it will increase the estate tax liability. In that case, you will need to report a basis coherent with the final estate tax value of the property listed in column E, Part 2. If you have more information, go to Schedule A for Form 8971. Read Column (e) for more information on consistent basis reporting and the amount you will report on Form 8949.
Some basic information from each taxable event is needed before calculating and reporting losses and gains on Form 8949. This includes the date acquired or disposed of, cost basis value (if available), along any adjustments made, such as selling at a loss or taking an offsetting gain against another asset class.
Crypto accountants are always here if there’s anything specific about tax deductions and advanced trading topics!