According to IRS guidance, all cryptocurrencies should be treated as property, not currency. Due to this, cryptocurrencies are taxed similarly to other assets, such as real estate, stocks, and bonds. Therefore, Crypto investors must declare capital gains from purchasing and selling crypto coins. In the case of capital loss, it can be used to offset their gains or income.
In 2019, the Internal Revenue Service (IRS) issued additional information about the taxation process on cryptocurrency. The timeline is listed below.
- August 2019
The IRS sent out tax notices (Letter 6173, Letter 6174, and Letter 6174-A) to over 10000 taxpayers with cryptocurrency transactions.
- October 9th, 2019
The IRS issued 43 questions and answers elaborating on the original guidance notice in 2014 and information addressing forks and airdrops.
- October 10th, 2019
The IRS released the 2019 Schedule 1, which starts with a question, “At any time during 2019, did you receive, sell, exchange or otherwise hold any financial interest in any virtual currency?”
With a question like this in place, taxpayers will be more aware and improve the rate of voluntary compliance for cryptocurrency. The IRS has an internal system that automatically generates notices when an imparity is detected between the 1099-K and tax return reports. The IRS also relies on tax practitioners to advise taxpayers and help them navigate the process of filing crypto taxes. Using crypto tax calculators can also greatly assist the taxpayer in this regard.
How Do I Report My Cryptocurrency Taxes?
When filing your crypto taxes, you must file the IRS Form 8949, which should contain a detailed record of all your taxable crypto events to authenticate your capital gains or losses for the year. A certified tax expert with TurboTax Live can provide you with online assistance from your Philadelphia home or anywhere else in the United States.
This tax form should display all your crypto trades and proceeds. For each crypto traded or sold, you will need to provide the date it was first acquired and the original amount it was developed for (in USD). This will establish your cost basis and Fair Market Value. After this, you can calculate your capital gain or loss for all your trades.
Once you have calculated this, you must transfer your capital gains or losses to the form 1040 Schedule. It is mandatory to fill and submit these two forms when filing your crypto taxes.
However, this is quite a tedious process and is highly prone to errors. To avoid this, you can use a crypto tax calculator, as it not only calculates your crypto taxes but also has additional features that can track all the historical prices and dates for each trade.
Why Can’t Exchanges Produce These Documents?
Suppose you are a trader that conducts crypto activities across multiple crypto exchanges. In that case, your cryptocurrency exchanges cannot provide accurate tax information, which must be filled in Form 8949 when cryptocurrency is sent from one business to another. In addition, the two deals involved did not maintain a record of the date and the original price (Cost Basis) when the cryptocurrency was acquired.
For example, let’s say that you have acquired 1 Bitcoin on the Coinbase exchange and then sent that Bitcoin to the Binance exchange. On Binance, Bitcoin was traded for Ethereum. Each business has 50% of the data needed to establish your gain or loss on that trade. Coinbase has your cost basis information, and Binance has your Fair Market Value information not shared. Easily figure out our binance tax and make the correct assessment archives to submit to your tax authority.
The taxpayer is responsible for keeping an accurate record and maintaining the historical price in fiat currency (USD) for when the crypto was initially acquired and when said crypto was disposed of. Using a crypto tax calculator can immensely simplify the process and is a godsend for addressing the cryptocurrency tax problem.
What are Some of the Best Crypto Tax Calculators?
TokenTax is one of the easiest crypto tax calculators on the market. TokenTax is the only crypto tax platform known to support every major crypto exchange. Apart from offering a crypto tax calculator service, it has additional tools that help report your cryptocurrency capital gains or losses and income taxes.
They can automatically import your crypto data as they directly connect with all the exchange platforms. You use an exchange that does not allow this feature; you can upload a file relating to your crypto trading data on their platform.
BearTax is considered to be a straightforward crypto tax calculator. The platform imports all your crypto transaction data using their integrations that span over 25 significant exchanges to calculate your capital gains and provide you with documents to file with your crypto taxes.
BearTax has a user interface that is relatively straightforward to understand. In addition, they have specific tools integrated into their crypto tax calculator, such as ‘smart matching.’ This tool helps you avoid hitting negative balances, which could impact the accuracy of your tax report.
ZenLedger is a crypto tax calculator with an easy-to-use interface. Integrated with all the leading exchanges, Zenledger also supports all major cryptocurrencies and fiat currencies.
It can calculate your crypto taxes and automatically fill out and provide you with a capital gains report, income and donation report, and closing reports. They also offer profit and loss statements for your Certified Public Accountant (CPA) or tax practitioner.