How to track and report crypto transactions for tax purposes

As cryptocurrencies and blockchain assets gain more acceptance and become more widely used, the Internal Revenue Service of the United States has taken a greater interest in how they should be taxed.

In the United States, crypto tax is applicable to cryptocurrency, which is classified as transactions rather than property or assets. Consequently, not accurately monitoring and filing these transactions can lead to penalties and fines.

This is a thorough guide for keeping track of and reporting crypto transactions for taxation in the United States.

How cryptocurrency is taxed in the U.S.

If you invest in crypto assets such as nonfungible tokens (NFTs) and then make further transactions for profit in the United States, you must be prepared to pay taxes on your crypto.

It is important to note that purchasing cryptocurrency by itself, or any increase or decrease in its value while it is in your possession, is not taxable. Taxes become applicable when you sell, invest in, or dispose of the asset and make a profit.

Cryptocurrency is liable for taxation through two avenues: capital gains tax and income tax.

The sale of an asset that was acquired at a discounted price will be subject to taxation of the profits earned. If a digital asset is sold or traded for a higher price than the one it was bought at, then the capital gains will be subject to taxation.

If crypto assets are held for less than a year, it is considered a short-term gain, whereas if they are held for more than a year, it is regarded as a long-term gain.

Capital gains events encompass the sale of cryptocurrency for fiat money as well as the transfer of cryptocurrency amounts exceeding $15,000 as a gift.

Additionally, when goods and services are bought using cryptocurrency, it is considered a capital gains taxable event. When one digital asset is traded or exchanged for another, it is also viewed as a capital gains event. This includes when NFTs are acquired using cryptocurrency.

It is therefore important to precisely monitor all cryptocurrency trades for tax reasons. That being said, reporting your capital losses can reduce capital gains taxes.

The head of tax at Koinly has stated that the ‘biggest mistake’ people make is not taking advantage of tax loss harvesting.

Taxation of income from cryptocurrency applies to profits from the extraction and staking of tokens. This includes the receipt of cryptocurrency from an airdrop or any return on investment from decentralized finance (DeFi) lending.

Receiving cryptocurrency in exchange for services rendered is also considered a taxable event.

Gains on cryptocurrencies that have been held for more than a year will be subject to the Internal Revenue Service’s long-term tax rates for cryptocurrencies.

For single individuals, no taxes would be imposed on crypto gains of up to $44,625. For those filing as heads of household or married couples filing jointly, the applicable taxes range from 0% to 20%, depending on the income tax bracket.

Refer to the table below for more information.

For profits made on cryptocurrencies held for less than 365 days, the tax rate will be determined by the ordinary income tax rate.

As illustrated in the table, the tax rate varies from 10% to 37% depending on the income bracket for single filers, married couples filing jointly, and heads of household.

Some cryptocurrency transactions which are exempt from capital gains or income tax:

How to track crypto transactions

It is essential to keep a precise record of all cryptocurrency transactions and to seek advice from a tax specialist to fulfill all responsibilities. For some, taking a screenshot of the few crypto transactions they have made during the year may be enough. For others, however, keeping track of crypto transactions across all Web3 ecosystems can be a difficult task.

A variety of specialized crypto tax software programs exist for monitoring and creating records of cryptocurrency dealings. Popular choices include Koinly, CoinLedger, and Accointing.

If you’d rather handle everything yourself, here is a guide that provides instructions on how to monitor and report cryptocurrency transactions:

By maintaining precise records and staying up-to-date on the most recent tax regulations, you can easily understand the tax effects of your cryptocurrency investments. Even though there are still numerous “unspecified scenarios” in regards to taxing crypto, the IRS is constantly striving to address them.

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Reporting crypto holdings on your taxes

You must submit all of your tracked crypto transactions to the IRS for taxation purposes.

Form 8949 is a document used to declare the sales and disposals of capital assets, including virtual currencies. It is divided into two sections: Part I for short-term transactions and Part II for long-term transactions.

You must select the appropriate box at the top of the page depending on whether your transaction was documented on Form 1099. Form 1099 B, which is expected to be distributed by exchanges, is utilized to declare different types of income obtained during the year, including earnings from stock investments and cryptocurrencies.

However, as most exchanges do not provide Form 1099-B for cryptocurrency transactions, it is likely you will have to choose option C (on Form 8949) which applies to short-term transactions that were not previously reported.

In order to complete Form 8949, you must supply the following details:

This applies to each column in Form 8949 (as shown below):

Once Form 8949 is completed, the total gain (or loss) must be reported on Schedule D of Form 1040.

Reporting crypto income

The most widely used individual income tax return in the United States is Form 1040. All crypto income must be reported on your 1040, as well as any capital gains or losses from crypto transactions.

Form 1040 has a question regarding cryptocurrency: “Did you receive any cryptocurrency as a reward, award, or compensation, or did you sell, exchange, gift, or otherwise dispose of a digital asset at any point during 2022?” Not providing the correct information or any form of dishonesty is considered tax fraud.

Receiving crypto as a business entity from payments for services, operating a mining income venture, or participating in staking income is considered to be self-employment. These must be reported on Schedule C of Form 1040.

When it comes to filing taxes for crypto income from airdrops, forks, wages, or hobby income, it is typically reported as “other income” on Schedule 1 of Form 1040.

A tax professional can be consulted for assistance in correctly filing taxes for cryptocurrency and accurately reporting them on one’s tax return.

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