Welcome to Blockchain Asia
$ 43,850
$ 1,588.1
$ 64.27

How to report your cryptocurrency trading to IRS

In recent years, the IRS has become increasingly interested in cryptocurrency reporting. If you sell an asset for a profit, you may have to pay capital gains tax on the profit. You’ll need the date you bought the cryptocurrency, the date you sold, swapped, or otherwise disposed of it, and the cost base to figure out your exact gain or loss (the amount you paid plus transaction fees).

Gains are subsequently taxed at a short-term or long-term rate, depending on how long you kept the asset. Short-term gains on assets held for less than a year are taxed as ordinary income, and long-term gains on assets held for more than a year are taxed at 0%, 15%, or 20%, depending on your taxable income and filing status.

Let’s imagine you bought a cryptocurrency for $2,000 in January 2021 and sold it for $5,000 two months later. The short-term capital gains rate would apply to the $3,000 capital gain. You’ll need to report your gains and losses on Schedule D of Form 1040 after you’ve calculated them on Form 8949.

Steps in preparing your tax filings

1. Come clean

If you withhold information on your taxes, you risk facing penalties, levies, and, in the worst-case scenario, tax evasion accusations. The IRS is suggesting that individuals who fail to report will not be able to claim ignorance with the amendment of Form 1040, which now includes a direct yes-or-no question on whether you received, sold, swapped, or disposed of cryptocurrencies.

2. Make sure your records are in order.

Until the 2023 tax year, cryptocurrency exchanges will not be required to give taxpayers 1099-B forms, popularly known as tax-reporting summaries. As a result, traders are responsible for keeping accurate records of their transactions.

Many exchanges, like as Coinbase, offer you to download your trading history, which may make calculating gains and losses easier for you, tax software, or a tax professional. However, if you make off-exchange trades, you may need to set up more time for research.

3. Engage the services of a professional

Consider dealing with a cryptocurrency-savvy tax professional if your case is complicated. They can walk you through the many accounting procedures for reconciling your gains and losses that the IRS allows, and help you decide which one is best for you.

4. Consider using tools for tracking

It won’t be tough to report a single trade on a single exchange. According to Shehan Chandrasekera, CPA and head of tax strategy for CoinTracker, a “average taxpayer” has three to five wallets and exchanges. This makes reconciling cost basis across platforms more difficult. If you’re a frequent trader, it can be worthwhile to invest in software that allows you to keep track of your transactions.

5. Make your losses work for you

You still have a chance to reduce your tax bill if you didn’t use tax-saving measures last year, such as tax-loss harvesting, gifting, or donating, but you realised losses. If you sold a currency for less than what you paid for it, you may be eligible to deduct up to $3,000 in losses on your taxes, just like stocks.