Cryptocurrency

How Do I File Taxes For Cryptocurrency?

No matter how you earn money, you need to file your taxes to ensure the correct amount has been paid in accordance with the IRS. Some people falsely believe that their main job is the only one that requires taxation, but in reality, all of your income streams need to be accounted for.

The best way to keep your files in order is to use software that helps you break down your income. Click here for the best crypto tax software on the market right now. 

However, it’s beneficial to learn about the basic steps the taxation software completes too.

We will walk you through the 5 steps of reporting and filing your taxes based on cryptocurrency.

Calculate Your Gains And Losses

Whether you sell your cryptocurrency, trade it or use it to buy goods and services, you’ll likely receive capital gains or even losses from the exchange.

These changes in value will affect your overall earnings and therefore the amount of taxes you need to pay.

Calculating these gains and losses is often where people struggle, however, we have an easy formula for you to use. Instead of counting every movement of money you incur, you should track the price of your assets when you first received them. Then learn the cost of these assets at the time of filing your taxes.

With that information use this formula:

Current Cost – Value At The Time Of Sale = Capital Gain or Capital Loss

If the number is a minus, then you have lost capital. If it’s positive then you have gained it.

Note these numbers in your 8949 form.

Fill In The Remaining Aspects Of The 8949 Form

The rest of the 8949 form needs to include information about the cryptocurrency. This helps the IRS understand how your finances are moving and allows them to track it.

Under (a), you need to describe the “property” that you have sold. This means noting the cryptocurrency name such as 0.21844160 ETH.

Next, you fill in (b), and note the date that you bought this property.

For the next column, note the date that the property was sold.

In (d) you put down the fair market value of this property.

In (e) you note the cost basis when purchasing this property.

And lastly in (h), use the information gathered from above to write down your gains or losses.

For each cryptocurrency you own, you need to fill in a new row.

Adding Total Net Gains To 8949 Schedule D

With 8949 filled in, you can move onto Schedule D. In this area, you need to write down your total net gains or losses from the tax year. 

The Schedule D forms allow you to report all of your capital gains and losses from every source from which you are receiving an income. This includes one-off gains, long-term projects, and other forms of interest lines you may be receiving. 

Include All Types Of Crypto Income

Depending on the type of situation you are in, you may need to report your crypto income in different ways.

Reporting Under Schedule 1

Crypto income through avenues such as forks, airdrops, hobby income, and crypto wages should be reported under Schedule 1, also known as “other income”.

Reporting Under Schedule B

If interest has been accumulated through your crypto wallet, then you need to report this under Schedule B. Anything from earning stakes, interest rewards or other lending-related connections should be here. 

Reporting Under Schedule C

If you use crypto in a business sense, then you should be reporting under Schedule C. This section is for people who receive a wage or payments akin to a job for mining or running a cryptocurrency occupation. You may be self-employed or working for a company, but either way, a wage-equivalent job should be filed under Schedule

Fill In The Rest As Normal

The last step in filing your taxes is to ensure the rest of your forms are filled in as normal. Don’t allow the worry of cryptocurrency to blur your mind and make you forget your other income.

Summary

The best way to ensure your cryptocurrency-related tax forms are filled in properly is to use software specifically designed to help you organize your income. But if you’re old school and would rather do it yourself, you can use our 5 tips above to walk you through the process.

Don’t forget to record your losses, as they can help reduce your overall tax payments.

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