Cryptocurrency Tax Guide – Navigating Reporting Requirements and Regulations

Cryptocurrency is being adopted at a rapid pace and used ever more frequently, with tax authorities trying to keep up. If you use cryptocurrency for investments or to make purchases, you will need to take a few considerations into account when you file your taxes.

The IRS considers the digital currency a capital asset, and taxes the gain (or loss) on its sale as one would on a stock or an investment property. Here’s how to handle it:

Reporting Requirements

Whenever you sell, trade or otherwise dispose of cryptocurrency (except for charitable donations) you must include that transaction on your tax return as a capital transaction and any realised gains must be reported for tax. Any realised gain is taxed at the applicable capital-asset tax rate depending upon your tax bracket.

In the case of crypto capital losses, that loss can be used to offset any future realised crypto capital gains. In addition, if you purchase crypto and accrue trading costs, those costs can be deducted from a certain amount of your crypto capital gains.

Beginning in 2023, all crypto exchanges will have to issue you and send to the IRS a Form 1099-B for each transaction. On your tax returns, you must report sales and exchanges of cryptocurrency as either a sale or as income earned. If you are mining cryptocurrency as a business activity, you will have to file a Schedule C Profit or Loss From Business and take deductions to which you are entitled to accurately determine your tax liability.

Taxes on Gains

One of the most commonly asked crypto tax questions is what, if anything, you owe for capital gains or losses after making a transaction. Because the IRS classifies cryptocurrencies as property, when you sell or trade for other stuff (cash or other cryptocurrency), that event creates a capital gain or loss that you have to report.

It’s also a taxable event if you spend crypto on goods, services or labour (the value at which you spend the crypto must then be reported as gross income, and any gains are calculated the same way if the crypto’s price has gone up since the purchase, and losses are calculated if the price drops below your purchase price).

Form 8949 must be completed to report your crypto-related capital gains or losses. Report how much was sold, how much you received from sales, cost basis and adjustments. Long-term gains have a lower tax rate than short-term gains, and loss can be carried forward to offset future gains up to $3,000 of your tax income each year.

Taxes on Losses

The IRS taxes any profit made from crypto transactions at a capital gains rate that’s calculated by taking the sales proceeds minus the cost basis: the same way stocks and other investments calculate capital gains and capital losses.

But not all of your crypto transactions result in realised gains or losses. You must report to the tax authorities crypto income you receive through any means except for buying it – say, through mining, staking or airdrops. That income is taxable in the 10-37 per cent income brackets.

By using blockchain analysis and third-party reports received from exchanges, wallets and third-party service providers, the Internal Revenue Service could track your crypto transactions. Through third-party service providers, it can issue John Doe summonses to users deemed to violate the law. A third-party service provider could create opportunities for filing taxes in an easier way by means of software that estimates your crypto taxes after importing information from supported exchanges and wallets.

Reporting Non-Taxable Events

You have to report every crypto transaction as a taxable event, even if it doesn’t involve a gain or loss of value – that is, every purchase of goods or services using crypto, every crypto-mined coin, every crypto-cryptocurrency swap. And the IRS taxes you every time you cash in your crypto for traditional money.

Employers need to report this income to the IRS, or in the case of crowdsourcing, it is the crowdsource platform that needs to report the income to the IRS; in the case where the crowdsource paid in crypto, the platform must report that money that employees earned and must report to the IRS any microtasks completed that they provided crypto micropayments. When completing income tax returns, any individual receiving crypto for wages would have to report the crypto currency’s fair market value at the time they received the wages, and report the wages as income.

If you hold an investment portfolio of cryptocurrencies, we recommend having Koinly track and record all the cost basis and proceeds from your realised gains from each transaction for one specific year. When you’re done, transfer that information onto Form 8949 to show your short- and long-term gains or losses from realised gains separately. Crypto taxes might not be straightforward, but they can be planned for – it’s simply a matter of paying attention and building a solid tax management strategy, including leveraging the advice of an accountant to get more insight into your personal tax situation, and how cryptocurrency might affect it.