This article is part of TokenTax’s Cryptocurrency Tax Guide.
Paying crypto taxes may seem daunting at first. But in the United States, because crypto is considered property for tax purposes, you report crypto taxes the same way you report other capital assets, such as stocks and real estate.
See more: What form do i need to file for crypto
5 basic steps for crypto tax filing
There are 5 basic steps involved in filing crypto taxes:
- Calculate your gains and losses.
- Fill out Form 8949.
- Report your totals from Form 8949 on Form Schedule D.
- Report any ordinary crypto income on the 1040 Schedule 1, unless your earnings are from self employment. In this case, use Schedule C.
- Complete the rest of your tax return, file, and pay your taxes.
For more on each step of the process, read below.
Step 1: Calculate total capital gains and losses
Every time you sell, trade, swap, or otherwise dispose of a crypto asset, you experience a taxable event, and therefore realize a capital gain or loss.
To determine how much your gain or loss is, you need to find the difference between the asset’s value at the time of its disposal and its cost basis. An asset’s cost basis is the amount for which it was acquired, including any transaction or brokerage fees.
It is just as important to your crypto capital losses as your gains because they may significantly reduce your tax liability in current or future tax years.
For indiviudal transactions in which cost basis is known, these calculations are relatively easy. However, calculating cumulative gains and losses often becomes more difficult as the volume of trades increases and/or you discover you’ve traded assets whose cost basis was unknown. In these cases, crypto tax software is a very valuable tool.
Step 2: Complete Form 8949
The Form 8949 is the tax form used to report cryptocurrency capital gains and losses.
Each sale of crypto during the tax year is reported on the 8949. If you had other non-crypto investments, they need to be reported on separate Form 8949s when you file your taxes.
For step-by-step instructions on how to fill out Form 8949, visit our Guide to IRS Form 8949 for Crypto Taxes. If this process seems overwhelming, don’t worry—crypto tax sotware like TokenTax will automatically fill out the entire form for you.
Step 3: Include Form 8949 with the Form 1040 Schedule D
The Form 8949 is included with the Form 1040 Schedule D, which reports your overall capital gains and losses. On this form, you list your totals separately for short term and long term capital gains and losses.
The Schedule D also includes gains and losses from Schedule K-1s from businesses, estates, and trusts of which you are a part. It also is where you will report capital losses carried forward from previous years or those that you wish to carry forward to future years.
Step 4: Report crypto income
Ordinary income on Form 1040 Schedule 1
Although crypto profit is often reported as capital gains, there are instances where it is recognized as ordinary income. These include crypto mining and staking, hard forks and airdrops, and crypto lending interest.
This crypto income is reported on Form 1040 Schedule 1.
At the top of the form, it asks, “At any time during the last tax year, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” If you owned or transacted crypto in the last tax year, you should check “yes” even if you had no taxable events to report on the form.
Total crypto income that you’ve received personally (i.e. not as a self employed person) is included in the Form 1040 Schedule 1 “Additional Income and Adjustments to Income” on line 8 “Other income.”
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Crypto tax software will calculate this total from your transaction history, so you’ll know exactly how much income you need to report on your Form 1040 Schedule 1.
Self-employment income on Form 1040 Schedule 1
You are self employed if you conduct business as a sole proprietor, independent contractor, member of a partnership, or are otherwise conducting business for yourself.
You may be self employed if you have a crypto mining operation, particularly if you want to deduct mining expenses from your income.
If your crypto income activities constitute self employment, then instead of reporting income on Form 1040 Schedule 1, you’ll need to put that income on a Form 1040 Schedule C and pay self-employment tax. Self-employment tax accounts for the Social Security and Medicare taxes usually withheld from employee paychecks.
You may be able to deduct expenses from your self employment income. For example, if you have a mining operation, it’s possible to deduct expenses of your equipment and electricity bill (if metered separately).
You may also be able to deduct expenses if you’ve used your home for this hypothetical mining operation, i.e. you’ve devoted a whole spare room to the mining rigs. In this case, you can refer to Form 8829 “Expenses for Business Use of Your Home.”
Step 5: Complete your return
At this point, you’ve completed the crypto portion of your tax returns. Once you complete the rest, you will be ready to file.
Do you need help calculating and preparing your crypto taxes?
If you need help with specific tax deductions and advanced trading taxation topics, an accountant with significant crypto tax preparation experience can answer your questions.
For more information, read our guide to finding a cryptocurrency accountant.
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- Reporting Losses on Your Crypto Taxes
- Guide to IRS Form 8949 for Crypto Taxes
- How to File Your Crypto Taxes with TurboTax