It is no secret to the market that cryptocurrencies are here to stay. They have proven to be a complete game breaker despite the confusion that surrounds them. While people all over the world have bought into cryptocurrencies in a big way and have managed to navigate most of the chaos, the vast majority of them are still clueless on how to report crypto taxes.
How to report crypto taxes – The fundamentals
Bitcoin and other cryptocurrencies are treated as stock, not as currency. This is true for all cryptocurrencies. This means that crypto is treated like other forms of property, such as stocks, gold, or real-estate.
You are required to report your capital gains and losses from your cryptocurrency trades on your taxes just as you would if you owned stocks. Failing to do so will land you in trouble for tax fraud.
When a taxable event occurs, you trigger a capital gain or capital loss that you need to report on your tax return. The official IRS guidance dictates the scenarios that constitute a taxable event.
What constitutes a taxable event?
Trading cryptocurrency to any fiat currency like the US dollar. Trading cryptocurrency to cryptocurrency (you ought to calculate the market value in USD at the time of the trade)
Using cryptocurrency for goods and services (you have to calculate the fair market value in USD at the time of the trade the same way you do it for crypto to crypto trades) Earning cryptocurrency as income (from mining or any other form of earned cryptocurrency)
What does not constitute a taxable event?
Sending cryptocurrency as a gift is not considered a taxable event.
- A transfer of cryptocurrency is not a taxable event (you can transfer cryptocurrencies between wallets or exchanges without being subject to realizing capital gains or losses)
- Buying a cryptocurrency with the US dollar is not a taxable event. You are not required to pay taxes until you trade or sell the cryptocurrency.
If you’ve decided to immerse yourself in the world of cryptocurrencies, it will behoove you to educate yourself on how to report crypto taxes.
Why can’t my cryptocurrency exchange give me an accurate tax report?
Users transfer cryptocurrencies in and out of exchanges non-stop. The exchange has no way to know when, how or at what cost basis you bought your cryptocurrencies. It only knows that they appear in your account.
The exchange loses its ability to provide you with an accurate report that details the cost basis and fair market value of cryptocurrencies the second you transfer them in or out of an exchange. Both the cost basis and the fair market value of the cryptocurrency are required for tax reporting, and you can also check your taxes on free crypto tax calculator.
How do I file my crypto taxes?
This is the short answer on how to report crypto taxes. To file and report your taxes, you need an IRS form 8949 and 1040 Schedule D. You start by listing all your cryptocurrency trades sales on the 8949 form with the following details – date of crypto purchase, date of crypto sale or trade, your proceeds or fair market value, your cost basis and finally, your gain or loss. Be sure to include both these forms in your yearly tax return.
Unfortunately, this is often too arduous a task for most people. The sad reality is most people do not have the time or patience to manual file their taxes. The alternative to this is finding a tool that does it for you.
The need for crypto tax software –
Cryptotrader.tax is built to ease tax reporting once and for all. It allows its cryptocurrency users to compile all their trading data by integrating the various exchanges and bringing them to one platform. The tax engine auto-generates the tax reports for the cryptocurrency users, just like 8949. Thousands of crypto users have figured out how to report crypto taxes without having to waste time or energy.
ZenLedger provides a simple, hassle-free way to calculate your crypto taxes on an easy to use interface. Zenledger is integrated with all the leading exchanges and supports the major crypto and fiat currencies.
Its platform imports the crypto user’s transaction history from the supported exchanges into its interface in a matter of minutes and does your tax documentation for you automatically. The documents include capital gains, income, donation, and closing reports. Apart from this, it provides the user with profit and loss statements. All of the documents generated via ZenLedger are designed to go from the platform into your tax returns without any issues.
It is one of the easiest ways to calculate your crypto taxes. The platform is integrated with 25 significant exchanges to calculate your gains and exports the documents required for you to file with your taxes.
BearTax is loaded with a number of useful features. To begin with, the user interface is easy to understand and use. Your withdrawals and deposits across the exchanges it supports are easily reviewable on the interface.
Its matching feature makes sure you avoid hitting any negative balances, which could result in reduced accuracy while filing your tax report. In addition to this, they are compatible with both centralized and decentralized exchanges, which makes decentralized trading much more manageable.
CoinTracker is known as a hybrid crypto-asset tracker and tax reporting software.
Its platform automatically synchronizes your asset balances and transactions from your accounts or local wallets, thereby providing the latest information on your cryptocurrency activities.
Its interface displays all of the digital assets you own and their associated trading history. CoinTracker also provides a performance tracker, which helps you track your crypto investment performance over time.
While cryptocurrencies have never been a walk in the park, filing taxes and navigating the confusion that surrounds it has never been easier. Be sure to use a tax calculator to speed up the process of filing and remove the guesswork on how to report crypto taxes.