Need to declare cryptocurrency on your taxes? Here’s how to use Form 8949 to do it
With the explosive rise and fall in the price of Bitcoin and other cryptocurrencies over the past year, you can be sitting on huge capital gains or losses. You’ll need to report them to the IRS when you file your taxes each year, and Form 8949 is the starting point.
You will have to pay capital gains tax on all profits, although you may be able to take a deduction for losses you have realized, which reduces the taxes you owe. Although you may think crypto transactions are untraceable, some companies report your transactions to the IRS on Form 1099. If you don’t report your earnings, the IRS will come knocking on your door asking for their share of the action. .
“Cryptocurrency is an area the IRS continues to focus on for enforcement,” says Brian R. Harris, tax attorney at Fogarty Mueller Harris PLLC in Tampa, Florida. He points out that even if you don’t receive a 1099 or other statement from your exchange, you still need to report the income.
Here’s what to know about reporting your gains and losses and how to use Form 8949.
Who should use Form 8949?
It is important to understand that you will not owe any cryptocurrency tax if you have not made a taxable gain. Unlike other types of investments, however, you can make a profit on cryptocurrency in two ways:
- Buy and then sell crypto for profit in a taxable account
- Exchange crypto for goods or services that are worth more than what you paid for
If one of these cases applies to you, you have a taxable capital gain and you must legally declare it.
However, if you have made a gain in a tax-efficient account such as an IRA, you do not need to report your transactions. That’s not a taxable Gain. However, crypto is not widely available in IRAs.
Finally, if you have incurred a loss while trading crypto, it is worth reporting that as well, as you may qualify for a deduction and reduce your tax bill. It might be cold consolation for losing money, but you’ll get tax relief for doing so.
How to report your cryptocurrency earnings
Before filing Form 8949, you will need to report that you have transacted in cryptocurrency near the top of Form 1040. The IRS requires all filers to indicate whether they have received or transacted in digital currency during of the tax year concerned.
When reporting your realized gains or losses on cryptocurrency, use Form 8949 to understand how your transactions are treated for tax purposes. Then you will enter this information on Schedule D, which totals your net capital gains and losses.
On Form 8949, you will indicate when you bought the cryptocurrency and when you sold it, as well as the prices at which you did so. The dates of purchase and sale are important, because the length of time you own your cryptocurrency determines the amount of your taxes.
If you’ve owned your cryptocurrency for less than a year, any gains will be taxed at short-term capital gains rates, which are the same as your regular income rates. These rates can be as high as 37%, so they may be higher than what you would pay if you qualified for long-term rates. Short-term sales are reported in Part 1 of the form, like the one below.
If you’ve held the property for more than a year, however, it’s considered a long-term investment and is eligible for more favorable treatment. The long-term capital gains tax rates are 0%, 15% or 20%, depending on your income level.
Sales of long-term investments are reported in Part 2 of the form, which looks almost like Part 1 above.
It should also be noted that if you generate income from cryptocurrency staking, you are also required to report this. But that income will be reported elsewhere on your tax return.
Provide details of your crypto gain/loss on Form 8949
After determining whether your gain or loss is short-term or long-term, you will need to enter the details of the transaction in the appropriate section of Form 8949. Each transaction requires the same information, entered in Part 1 (for transactions term) or Part 2 (for long-term transactions), in the corresponding column.
For most transactions, you will complete:
(a) The name or description of the asset you sold
(b) When you acquired it
(c) When you sold it
(d) At what price you sold it
(e) The cost of the asset or other basis
(h) Gain or loss
Once you have itemized all of your transactions on Form 8949, total your entries, then transfer the information to the corresponding sections of Schedule D. On Schedule D, you subtract your cost base from the total proceeds to arrive at your total capital gain. or loss. From there, Schedule D will determine the amount of tax you owe or the type of deduction you receive.
What to do if you don’t receive 1099 from your crypto exchange?
All brokers and some crypto exchanges provide detailed information about your transactions on a 1099 form each year. The tax form usually provides all the information you need to complete the 8949 form. However, many crypto exchanges do not provide a 1099 , leaving you with Work to do.
“Most crypto exchanges don’t do 1099 reports, and they aren’t required to do so yet,” Harris says. He notes, however, that laws are already in place that require crypto exchanges to report transactions in the 2023 tax year to file in 2024. Until then, it is up to traders to determine their liability. to tax.
Without these reports, it is a little more difficult for traders to calculate their potential gains and losses.
“It will be up to you to establish your holding period, your cost basis and your product,” Harris says.
That means digging through your transaction records, noting dates of purchase and sale, product, and whatever else is required on the 8949 form. That’s not the idea of a fun Saturday afternoon, but it can get even more complex due to so called ordering rules.
Ranking rules govern which tax lots are sold at what time, meaning they determine whether a given sale is a short-term or long-term investment.
For example, imagine you bought 100 bitcoins in January, 100 in February, and then another 100 in December. Then, in March of the following year, you only sold 250 at a profit. You will have both a short-term gain (for assets held for less than a year) and a long-term gain (for coins held for more than a year). But how do you divide the tax between the short and the long term?
Harris says that unless you can identify a specific individual bitcoin unit, you should use what’s called “first in, first out” accounting. This means that you will count the oldest purchases first, until you have counted all the parts sold.
Continuing the example above, you will register a long-term gain on the first 100 coins purchased in January and the second 100 from February. The next 50 coins would be counted as a short-term gain since they were only held from December to March of the following year.
You will need to split transactions this way and report them by their holding period on Form 8949.
How do you report earnings on the cryptocurrency you have spent?
As mentioned above, trading cryptocurrency is not the only way to rack up a taxable gain. Under IRS rules, you can also spend your way to a cryptocurrency profit, a fact that makes cryptocurrency difficult to use as real money.
“If you spend cryptocurrency, that’s selling or trading cryptocurrency and it could be a taxable event,” Harris says. “For example, if you trade crypto for a pizza, you will have a gain or loss relative to the fair market value of that pizza.”
You will need to determine the fair value of your purchase (in dollars) and then compare it to your cost base (what you paid for the cryptocurrency). Next, to determine your holding period, you will need to identify when you purchased the crypto and the date you spent it.
Total the gains and losses from these types of purchases and enter them into Form 8949 as if you were otherwise trading cryptocurrency.
At the end of the line
Form 8949 helps you report realized capital gains and losses, ensuring that your taxable gains are properly recorded and that you are not taxed more than you should be. It also ensures that if you have made a loss, you can claim any taxable benefit to which you are entitled.
Finally, although you will not receive a statement of your taxable income from an exchange, this does not absolve you of the responsibility to report and pay your tax liability.