How to Report Cryptocurrency On Your Taxes in 5 Steps

Not sure how to report your cryptocurrency taxes? 

In this guide, we’ll break down how you can report your cryptocurrency gains, losses, and income in just 5 easy steps.‍

Do I need to report crypto on my tax return?

In the United States, cryptocurrency is subject to ordinary income and capital gains tax. 

While crypto transactions are pseudo-anonymous, it’s important to remember that the IRS can track transactions through exchange-provided 1099 forms. In the past, the agency has even worked with contractors like Chainalysis to analyze transactions on blockchains like Bitcoin and Ethereum. 

For more information, check out our complete guide to cryptocurrency taxes.

How do I report crypto on my tax return? 

There are 5 steps you should follow to file your cryptocurrency taxes:

1. Calculate your crypto gains and losses
2. Complete IRS Form 8949
3. Include your totals from 8949 on Form Schedule D
4. Include any crypto income 
5. Complete the rest of your tax return

We’ll break down these 5 steps in detail below! 

If you’re looking for an easy way to simplify the process, crypto tax software like CoinLedger can help! Just connect your wallets and exchanges and let the platform do the rest.

1. Calculate your crypto gains and losses

Every time you dispose of your cryptocurrency, you’ll incur capital gains or capital losses. These disposal events include, but are not limited to: 

• Selling your cryptocurrency for fiat 
• Trading your cryptocurrency for another cryptocurrency 
• Buying goods and services with cryptocurrency 
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To calculate your gain or loss from each transaction, you’ll need to track how the price of your crypto has changed since you originally received it.

Here’s a formula you can use: 

In this case, your proceeds are how much you received to dispose of your cryptocurrency. Meanwhile, your cost basis is your cost for acquiring your cryptocurrency. 

Once you’ve finished your calculations, you can report your gains and losses on Form 8949.

How to report your capital gains/losses

To better understand how to calculate your capital gains and losses, let’s take a look at an example.

Unfortunately, these calculations aren’t always so simple. An active cryptocurrency trader may have thousands of buys and sells in a year, making it difficult to track their original cost basis. 

Cryptocurrency tax software like CoinLedger can handle this for you automatically. Simply connect your exchanges, import your historical transactions, and let the software crunch your gains and losses for all of your transactions in seconds.

2. Complete IRS Form 8949

IRS Form 8949 is used for reporting the sales and disposals of capital assets. Some examples of capital assets include stocks, bonds, and yes, cryptocurrencies.

Let’s break down how you can fill out Form 8949. 

Short-term vs. long-term disposals 

Form 8949 consists of two parts: Part I for Short-term and Part II for Long-term.

If you disposed of your cryptocurrency after less than 12 months of holding, your gain or loss should be reported on Part I. If you dispose of your crypto after more than 12 months of holding, your gain or loss should be reported on Part II.

Was your transaction reported on Form 1099? 

The first step is to check the relevant box at the top of the sheet: A, B, or C. 

1. Short-term transactions reported on Form(s) 1099-B, showing basis was reported to the IRS
2. Short-term transactions reported on Form(s) 1099-B, showing basis was not reported to the IRS
3. Short-term transactions not reported to you on Form 1099-B

At this time, most exchanges don’t issue Form 1099-B to customers and the IRS. As a result, you’ll most likely select option C. 

How to report your gains and losses on Form 8949 

Next, you’ll need to fill in the following information for each of your gains and losses. 

• A description of the crypto-asset you sold (a)
• The date you originally acquired your crypto-asset(b)
• The date you sold or disposed of the crypto-asset (c)
• Proceeds from the sale (fair market value) (d)
• Your cost basis for purchasing the crypto-asset (e)
• Your gain or loss (h)

Want a demonstration of how to fill out Form 8949? Check out the video below. 

Do I need to report my capital losses? 

In addition to your capital gains, you should report your short-term and long-term cryptocurrency losses on Form 8949.After all, every taxable event must be reported to the IRS. 

There’s also a tax benefit to reporting capital losses. Capital losses can offset your capital gains and up to $3,000 of personal income. 

For more on this subject, check out our complete guide to tax-loss harvesting.  

3. Include totals from 8949 on Schedule D

Once your 8949 is filled out, take your total net gain or net loss and include it on Schedule D.

Schedule D allows you to report your overall capital gains and losses from all sources. In addition to your short-term and long-term gains from cryptocurrency, other line items reported on Schedule D include Schedule K-1s via businesses, estates, and trusts.

4. Include any crypto income 

In certain scenarios, you may earn cryptocurrency income through mining, staking, interest, or as compensation for your labor. In these situations, you’ll recognize ordinary income subject to income tax.

What form should I use to report my crypto income? 

The form you’ll need to use to report your crypto income varies depending on your specific situation. 

Schedule 1 - If you earned crypto from airdrops, forks, or other crypto wages and hobby income, this is generally reported on Schedule 1 as other income. Most investors will use this form to report their crypto income. 

Schedule C - If you earned crypto as a business entity, like receiving payments for a job or running a cryptocurrency mining operation, this is often treated as self-employment income and is reported on Schedule C. In this case, you may be able to deduct related costs such as electricity. 

How do I answer the crypto question on Form 1040? 

When you report your income, it’s likely that you’ll see the following question on Form 1040:

‍“At any time during 2022, did you: (a) receive crypto as a reward, award, or compensation; or (b) sell, exchange, gift, or otherwise dispose of a digital asset?”

If you earned cryptocurrency income or disposed of a crypto-asset, you should answer ‘Yes’ to this question. Intentionally lying on this question is considered tax fraud. 

For more information, check out our guide to the crypto tax question on Form 1040.

5. Complete the rest of your tax return

Now that you have reported your capital gains and income, you should be finished reporting all the crypto-related transactions on your tax return. Once you’ve finished the rest of your forms, you’ll be able to submit your tax return to the IRS.
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How much tax do I pay on cryptocurrency? 

The tax rate you pay on cryptocurrency varies based on multiple factors, including your holding period, your tax bracket, and whether you earned cryptocurrency income or capital gains. 

You’ll pay long-term capital gains tax when you dispose of cryptocurrency after 12 months or more of holding. Depending on your income bracket, this can vary between 0-20%. 

You’ll pay income tax when you earn cryptocurrency income or dispose of crypto after less than 12 months of holding.  Depending on your income bracket, this can vary between 10-37%. 

For more information, check out our guide to cryptocurrency tax rates. 

Get started with cryptocurrency tax software

There’s no need to fill out your tax forms by hand. Today, more than 300,000 investors use CoinLedger to generate a complete tax report in minutes. 

You’ll be able to automatically import your transactions from exchanges like Coinbase and blockchains like Ethereum in just a few clicks.

Based on this data, CoinLedger automatically generates your crypto tax forms. You can then upload your reports directly into TurboTax or TaxAct to include with the rest of your tax return or send them directly to your tax professional.

Get started with a free CoinLedger account today.

Frequently asked questions 

Let’s cap things off by answering a few frequently asked questions about reporting your cryptocurrency taxes. 

How do I report crypto on my taxes? 

Any cryptocurrency capital gains, capital losses, or income events need to be reported on your tax return. You can report these events on Form 8949 and depending on your specific circumstances, Form 1040 Schedule B, C, and/or D. 

How does the IRS know if you have cryptocurrency? 

The IRS can track transactions through 1099 forms issued by major exchanges. In addition, the IRS has worked with contractors like Chainalysis to analyze blockchain transactions. 

How much cryptocurrency do you have to report on your tax return? 

You are required to report all of your taxable income from cryptocurrency on your tax return, regardless of the amount. 

Do I pay taxes on crypto if I lose money? 

Reporting capital losses comes with a tax benefit. Reporting capital losses can offset capital gains and up to $3,000 of personal income. 

What happens if you don’t report cryptocurrency on your taxes? 

Intentionally not reporting cryptocurrency on your taxes is considered tax evasion. The maximum penalty for tax evasion is a $100,000 fine and 5 years imprisonment.

Disclaimer - This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA, or tax attorney on how you should treat the taxation of digital currencies.