Crypto Taxes: Reporting Your Investment Gains And Losses

Cryptocurrency is a digital asset, and the IRS treats it like stocks, bonds, and other capital assets. Like these assets, the money you gain from crypto is taxed at different rates, either as capital gains or as income, depending on how you got your crypto and how long you held onto it. In the US, crypto income is subject to income and capital gains tax. Crypto losses can be used to offset 100% of your gains from not just crypto but also stocks and other assets.

Capital gains and income tax

In the US, crypto is considered a digital asset, and the IRS treats it like stocks, bonds, and other capital assets. The money you gain from crypto is taxed at different rates, either as capital gains or as income, depending on how you got your crypto and how long you held onto it.

Capital Gains Tax

When you sell your crypto for a higher price than you bought it for, you will owe taxes on the profit. The amount of tax you pay depends on how long you've held the asset.

Short-term capital gains tax

If you've held your cryptocurrency for less than a year, your disposals will be subject to short-term capital gains tax. For tax purposes, this is treated the same as ordinary income and can range from 10% to 37% depending on your income level.

Long-term capital gains tax

If you've held cryptocurrency for more than a year, your disposals will be subject to long-term capital gains tax. This ranges from 0% to 20% depending on your income level.

Income Tax

Anytime you're seen to be 'earning' crypto, it'll be subject to Income Tax instead of Capital Gains Tax.

Ordinary income tax

If you earn cryptocurrency — whether through your job, mining, staking, or airdrops — you’ll recognize ordinary income subject to income tax. This can range from 10% to 37% depending on your income level.

Calculating Capital Gains and Losses

To calculate the amount of capital gain or loss, you’ll first need to know how much crypto you started with. This is called your cost basis.

When you buy cryptocurrency, your cost basis is generally determined by how much you paid for it, including any associated fees. However, if you received crypto from mining or staking, your cost basis is determined by the fair market value when you received it.

When you sell your crypto, you can subtract your cost basis from your sale price to figure out whether you have a capital gain or capital loss. If your proceeds exceed your cost basis, you have a capital gain. If not, you have a capital loss.

Reporting Crypto on Taxes

US taxpayers should report crypto capital gains and losses on Form 8949 and Schedule D and any ordinary income from crypto on Form 1040 Schedule 1 or Schedule C for self-employment.

Crypto mining and staking

If you are mining or staking as a hobby, you will report the value of the currency earned as "Other Income" on Line 8 of Schedule 1. If you are running a mining or staking operation as a business, you will report your earnings on a Schedule C and will be subject to self-employment tax. As the mining or staking operation is being treated as a business, you may also deduct business expenses such as computer equipment or any other equipment necessary to keep the operation running.

It is important to note that selling or trading the cryptocurrency that you mined or staked will be realized as a capital gain or loss on that asset. As such, you will be required to report the disposition of your crypto asset(s) on Form 8949.

Additionally, it is very important to keep detailed records of your mining or staking activities, including when coins were earned, how much was earned, and what the fair market value was when earned. This will help ensure accurate reporting and simplify tax filing.

In the US, crypto miners and stakers must also be aware of the potential need to pay quarterly taxes on their earnings. This applies if the total tax owed for the year is expected to exceed $1,000. Under the American pay-as-you-go tax system, miners and stakers must estimate and pay taxes on their income every quarter to avoid a large tax bill at the end of the year. These quarterly payments are due four times a year: April 15, June 15, September 15, and January 15 of the following year.

Overall, it is important to understand the tax implications of crypto mining and staking activities and to keep accurate and detailed records to ensure compliance with tax regulations.

Crypto as a gift or donation

When it comes to giving or receiving crypto as a gift, it is important to note that this does not trigger a taxable event in most cases. However, there are certain scenarios where taxes may come into play. Here are the key considerations:

Giving Crypto as a Gift:

• Gifts under a certain value are typically tax-free for the giver. In the US, gifts below $15,000 in 2023 and $18,000 in 2024 per recipient are exempt from gift taxes.
• Gifts exceeding the annual threshold must be reported to the IRS using Form 709. These larger gifts count towards an individual's lifetime gift exemption, which is $11.7 million in 2023 and $13.61 million in 2024.
• It is important to keep records of the cost basis of the crypto, which is the original purchase price plus any fees. This information will be useful for the recipient when they dispose of the crypto.

Receiving Crypto as a Gift:

• Receiving crypto as a gift is generally not considered a taxable event, and you do not need to recognize it as income.
• However, when you sell or dispose of the gifted crypto, it becomes a taxable event. You will be subject to capital gains tax or capital losses, depending on whether the crypto's value has increased or decreased since you received it.
• To calculate your tax liability, you will need to determine your cost basis by comparing the gifter's cost basis (their purchase price plus fees) with the fair market value of the crypto at the time of the gift and at the time of sale.

Donating Crypto:

• Donating crypto to a registered charity or tax-exempt nonprofit is generally not considered a taxable event and can provide tax benefits.
• In the US, donations to a 501(c)(3) organization can reduce your income tax liability.
• If you've held the crypto for over a year, you are typically eligible for a tax deduction equal to the fair market value of the crypto at the time of donation.
• For holdings of less than a year, the deduction amount is usually the lower value between your original cost basis and the fair market value at the time of donation.

It is always recommended to consult with a tax advisor or crypto tax specialist to ensure you understand your specific tax obligations and make informed decisions regarding crypto gifts and donations.

Crypto trading and selling

Calculating Capital Gains and Losses:

Every time you trade, sell, swap, or dispose of a cryptocurrency, you trigger a taxable event and realise a capital gain or loss. To determine the amount of capital gain or loss, you need to calculate the difference between the asset's value at the time of disposal and its cost basis. The cost basis includes the amount the asset was acquired for, along with any associated fees.

Reporting Crypto on Taxes:

In the United States, taxpayers need to report crypto capital gains and losses on Form 8949 and Schedule D. Additionally, any ordinary income from cryptocurrency mining or staking should be reported on Form 1040 Schedule 1 or Schedule C for self-employment. It is crucial to maintain proper documentation to comply with IRS regulations.

Completing the Tax Forms:

Fill out Form 8949 by providing information about each crypto sale during the tax year. Organise the calculations row by row, including details such as the date acquired, date sold or disposed of, proceeds, cost basis, and any adjustments. Then, transfer the totals from Form 8949 to Schedule D of your tax return.

Reporting Crypto Income:

If you have received or disposed of cryptocurrency during the tax year, it needs to be reported. Any rewards or payments in crypto are also considered taxable income, similar to ordinary income. This can be reported on Form 1040 Schedule 1 for ordinary income or Form 1040 Schedule C for self-employment income.

Finalising Your Tax Return:

Once you have completed the necessary forms and calculated your capital gains and losses, you can finalise your tax return. Submit your tax return and pay any taxes owed to the appropriate tax authorities.

It is important to consult with a certified accountant or a crypto tax professional if you are unsure about how to report your cryptocurrency transactions on your taxes, especially for the first time. They can provide personalised guidance and ensure compliance with the applicable tax regulations.

Crypto tax forms and reporting

Crypto Tax Forms:

• Form 1040 Schedule D: This is the main form used to report capital gains and losses from the sale or trade of crypto. It is used to reconcile the different types of gains and losses and determine the taxable amount.
• Form 8949: This form is used to report crypto capital gains and losses in detail. It includes information such as the date acquired, date sold or disposed of, proceeds, and cost basis for each transaction.
• Form 1040 Schedule 1: This form is used to report additional income and adjustments, including ordinary income from crypto activities such as staking, mining, and airdrops.
• Form 1099-MISC: Cryptocurrency exchanges or brokers may issue this form to report "miscellaneous income," such as income from staking, mining, or other crypto rewards. It is used to report income of $600 or more.
• Form 1099-B: This form is used to report the proceeds from broker and barter exchange transactions. It may be provided by the crypto platform for crypto sales transactions.
• Form 1099-NEC: This form is used to report non-employee compensation, such as income earned from crypto-related activities as a freelancer or independent contractor.

Crypto Tax Reporting:

To accurately report your crypto taxes, follow these steps:

• Calculate Crypto Gains and Losses: Determine the difference between the asset's value at the time of disposal and its cost basis (the amount you paid, including fees) for each crypto transaction.
• Complete Form 8949: Document all your crypto transactions on Form 8949, including short-term and long-term trades. Provide details such as the description of the property, date acquired, date sold, proceeds, cost basis, and gain or loss for each transaction.
• Transfer Totals to Schedule D: Transfer the totals from Form 8949 to Schedule D of your tax return, separating short-term and long-term capital gains and losses.
• Report Ordinary Income: Report any ordinary income from crypto activities, such as staking, mining, or self-employment, on Schedule 1 of Form 1040. If you're self-employed, use Schedule C instead.
• Finalize and Submit Your Tax Return: Complete the rest of your tax return, ensuring accuracy. Submit your tax return and pay any taxes owed.

It's important to consult with a tax professional or use specialized crypto tax software to ensure compliance with IRS regulations and accurate reporting of your crypto taxes.

Frequently asked questions