- Crypto trading activity needs to be reported on your tax return every year.
- If you sold crypto, you need your transaction history to calculate capital gains or losses.
- Failing to report crypto activity to the IRS could result in an audit.
Every year, millions of Americans gather their W2s and 1099s, fire up their tax software (or send piles of documents off to their accountants), and get ready to file their tax returns. For some, it's a process that goes off without a hitch — but for others with more complicated financial situations, it can be a pain in the neck.
And for those who have been involved in the cryptocurrency markets, taxes can be downright tedious. But if you break the process into a few steps, it might be easier to navigate.
Taxable events for cryptocurrency
Crypto is taxed as property by the IRS, which means that investors don't pay taxes on their assets when they buy or hold them, only when they sell or exchange them. "It has to be transactional for there to be a tax," says Jeremy Johnson, a Texas-based certified public accountant.
That means crypto is largely in the same category as assets such as stocks or real estate — selling it, exchanging it for another crypto, or using it to purchase a good or service triggers a taxable event. Profits from mining, staking, and similar activities are also taxable.
There is a simple yes or no question on Form 1040 that asks if you received, sold, exchanged, or disposed of any virtual currency during the tax year. If you check "yes," then you'll need to attach another document, Form 8949, to your return with more details.
Calculating your gains and losses
1. Gather documents
At the top of Form 8949, you'll need to check one of three boxes — this has to do with whether or not your transactions were reported to the IRS.
Some exchanges and platforms may send you tax documents, namely 1099s, detailing your transaction history for the previous year, or make them available for download in your account. Others, including decentralized exchanges, might not.
"Try and make a good-faith estimate of your income from your crypto trading activity. Just don't report numbers you don't believe are true," says Clinton Donnelly, president and founder of CryptoTaxAudit, a tax firm that works exclusively with crypto traders and defends people in IRS audits.
Whether you can get your hands on these documents or not, you'll need information related to each and every transaction you made for the previous year, and use that information to fill out Form 8949. This shows the IRS that you made the effort to do the math and give them an estimate of what you owe.
The information you need for each transaction includes the following, which should be reported on Form 8949:
- Description of property: What the asset is (bitcoin, for example), and the quantity traded.
- Date acquired: The month, day, and year that you originally came into possession of the asset.
- Date sold or disposed of: The month, day, and year that you disposed of the asset.
- Proceeds: The amount or value you received in exchange for the crypto.
- Cost or other basis: How much you paid for the asset when you acquired it.
- Adjustment, if any, to gain or loss: If for some reason you need to revise the cost basis for an asset, do it here.
2. Calculate gain or loss
From there, it's all about doing the math to calculate your capital gains or losses. Johnson says the math itself isn't all that difficult if you have the numbers needed to execute the formula.
The formula itself is nothing more than subtracting your cost basis (the amount you initially paid for the asset) from your realized amount, or proceeds (how much you received when you sold it). If it's a positive number, you have a gain — if it's negative, you have a loss.
Proceeds - cost basis = capital gain or loss
Here's how this might look for a trader who had only a few transactions for the year:
Transaction 1: Purchased 1 BTC for $10,000, and sold it four months later for $15,000
- $15,000 - $10,000 = $5,000 capital gain
Transaction 2: Purchased 3 ETH for $3,500, and sold them six months later for $2,000
- $2,000 - $3,500 = -$1,500 capital loss
Transaction 3: Purchased 10,000 Dogecoin for $5, and sold one week later for $7
- $7 - $5 = $2 capital gain
Note that these are all simplified examples of short-term holdings, which are assets held for less than 12 months. You need to repeat the process on a separate portion of Form 8949 for long-term holdings.
While the math is fairly simple, experts say it's easy to get overwhelmed when there's a lot of transaction data to take into account. For that reason, it may be wise to bring in a tax advisor or use tax software that crunches the numbers for you.
3. Calculate your totals
Once you've calculated your gain or loss for each transaction, you'll need to add it all up and insert the total near the bottom of the form.
Not every column needs a total, and the most important aim you're trying to achieve is getting an overall total for your cost basis (how much you initially paid for your assets), your proceeds (what you received, in aggregate, from disposing of your assets), and your overall capital gain or loss from your crypto trading activity.
Reporting cryptocurrency on your tax return
Report your net gain or loss on Schedule D
The hard part is mostly done. Take the numbers you've calculated on Form 8949 and report them on another form: Schedule D.
Schedule D is a summary of your capital gains and losses for the year, while Form 8949 is a supplemental form to show the IRS you did the actual work of tallying it all up.
It's a simple enough form to fill out, too: Just follow the steps outlined there, report your numbers for both your short-term and long-term holdings, and then arrive at an overall number for your annual capital gain or loss.
Note: While you should do your best to report accurate numbers to the IRS, it's unlikely that you'll trigger an audit by making a small miscalculation, experts say. To avoid errors, consider working with an accountant or using sophisticated online tax software.
Report any crypto income on Form 1040
Aside from your crypto capital gains and losses, you may have also received additional income from your crypto holdings. Examples include staking, acquiring crypto as a form of payment, air-dropping, crypto mining, or even earning coins or tokens through play-to-earn games.
In these cases, you'll need to report the crypto as income rather than a capital gain or loss. It will be taxed as ordinary income, according to your federal income tax bracket.
You'll also need to report any crypto income using yet another supplemental form — either Schedule 1, Schedule B, or Schedule C, depending on how you received the income. For example, if you were paid in crypto for completing a service, you'd report it on Schedule C, whereas assets received via an air-drop would need to be reported on Schedule 1.
Recordkeeping for cryptocurrency taxes
Gathering your paperwork to fill out the tax forms can be difficult, depending on how active you were in the crypto markets during the past year, and how good you are at keeping records and staying organized. It may be tempting to blow it off or simply not report anything. That can be a big mistake, experts warn, and may come back to bite you.
"There are two ways the IRS enforces: if you're not reporting all of your activity, your tax return is simply inaccurate, and you could get hit with a 20% inaccuracy penalty, plus interest," says Donnelly.
"But if you don't file anything and the IRS discovers this — and they're aware that you didn't report it — it's tax evasion," he says. "That's subject to a penalty of up to $250,000 and up to five years in jail for each year you don't file."
The IRS is ramping up crypto enforcement, so your best bet is to report your numbers to the best of your ability and get help if you're unsure how to do it correctly.
If you've used multiple platforms to trade crypto or have assets in multiple wallets, experts recommend using a crypto-tracking software to streamline your transaction history, such as CoinTracking, Koinly, or CoinLedger.
"It can open up a can of worms if you don't report your crypto," says Johnson. "So, no matter how big or small your gains, report your activity."
FAQs on how to report crypto on taxes
Do I have to pay taxes on every crypto transaction?
Yes, you pay taxes on every crypto transaction that involves a sale or exchange. Cryptocurrency is treated as property by the IRS, which means it is categorized similarly as assets such as stocks or real estate. Selling it, exchanging it for another cryptocurrency, or using it to purchase a good or service triggers a taxable event.
What if I lost money on crypto investments?
If you lost money on crypto investments you may be able to offset capital gains taxes you owe in the same way you can write off other types of investment losses.
Are there any tax benefits for holding crypto long-term?
The tax benefits for holding crypto long-term are the same as holding other types of investments long-term — primarily, access to lower capital gains tax rates.
