How do you file crypto taxes?

To help you all the way, we have compiled the 5 major steps you need to take to file your crypto taxes.

i.           Getting started

First, you need to evaluate what cryptocurrencies you hold. You also need their market value on the day they were acquired and redeemed (sold or used to make a purchase.). As mentioned earlier, you will need to fill these details in Form 1040 under Schedule D.  Once you have these details gathered, you can proceed to the next step.

ii.          Analyzing your portfolio

Analyzing your cryptocurrency portfolio is easy if you only have assets in single crypto like Bitcoin or Ethereum. However, if you hold multiple cryptocurrencies, then you need to ensure that you have completed the previous step for all of them. Most cryptocurrency exchanges have sufficient capabilities to help you prepare reports and analyze your portfolio. You can also sign up for a portfolio management product designed specifically for cryptocurrencies.

iii.               Correcting and classifying your transactions

By now, you should have all the raw data available, and it is time to classify all your transactions. A few other points in addition to the taxable events that we have already covered are below:

  • If you received any cryptocurrency as a payment for providing a service or product, then it would have to be reported as regular income. You will have to pay Federal Taxes as well as state tax (depending on where you reside) on this income.
  • Bitcoins that are received by mining are taxed as ordinary income. The same goes for cryptocurrencies received by airdrop or hard-fork exercise. You may have to pay a self-employment tax in case of mining activities.
  • Bitcoins bought for an investment and sold at a profit are taxed depending on the holding period. If it is less than 1 year, then it is taxed as ordinary income. If the holding period is over a year, then it is treated as capital gains with a 3.8% additional tax on the investment income.
  • Donations in cryptocurrencies to eligible charities qualify for tax exemptions.

iv.         Reviewing your taxable gains and defining your tax strategy

Once you have classified your transactions and evaluated your gains, it is time to figure out the best strategy to evaluate taxes and comply with all regulations. As you define your tax strategy, there are 3 things that you must consider:

  • Calculate your holding periods accurately
  • Account for all losses
  • Keep a tab on any notification/rules laid down by the IRS

For-profits, it is always better to convert the cryptocurrency to dollars rather than another cryptocurrency. You will be taxed either way, so it is better to have some real currency that you pay taxes on. However, this can differ depending on your total income, risk level, and goal with cryptocurrency investment.

v.          Generating and interpreting your tax report

Once you have all your cryptocurrency data stored and analyzed, you can generate your tax report and check your liability. To ensure that it meets all IRS regulations regarding cryptocurrency taxation. Reviewing the report will help you find out if there were any other ways by which you could have saved on taxes. For instance, holding cryptocurrency for over a year attracts capital gain tax, which can vary from 0% to 20% as per your tax bracket. On the other hand, cryptocurrency held for less than a year attracts tax around a rate of 40%.

Cryptocurrency taxation is something that you can easily do yourself once equipped with the right knowledge. This guide should serve as a starting point in helping you evaluate your tax liability and what you can do better to ensure that you pay taxes only as per your actual profits. Crypto-assets are likely to grow in the coming years- and stay updated with what the IRS has to say about them will ensure that you are always on the right side of the law as you reap the rewards.