How to report and track crypto transactions?

How to report and track crypto transactions?

Taxes are imposed on crypto assets, and they must be reported and tracked to the IRS. This comprehensive tax guide will tell you everything.

How To

Join us on Social Networks

The Internal Revenue Service of the United States has become increasingly interested in taxing cryptocurrencies and other blockchain assets as they continue to gain popularity and adoption.

Cryptocurrency is taxed in the U.S. as a transaction, not an asset or property. In the U.S., cryptocurrency is subject to a crypto tax and is classified as transactions instead of assets or property.

This is a comprehensive guide to tracking and reporting cryptocurrency transactions for tax purposes.

What is the taxation of cryptocurrency in the U.S.?

If you are a U.S. resident and you have invested in crypto assets such as non-fungible tokens, then you will be subject to crypto taxation.

It’s important to note that the purchase of crypto, or its increase or decrease in value during your investment period is not taxable. You will be taxed if you invest, sell or dispose of an asset for any gain.

Taxation of cryptocurrency is based on two factors: capital gains and income tax.

Capital Gains Tax

This is applicable to the profits made from selling an asset purchased at a cheaper price. Capital gains tax is applicable to any gains made from the sale or trading of digital assets at a higher value than when purchased.

Crypto assets held less than one year are considered short-term gains. If the crypto assets were held for over a year, they are considered a long-term profit.

Capital gains include the sale of cryptocurrency for fiat currencies and the gifting of cryptocurrency (over $15,000.)

A purchase of goods or services using cryptocurrency is also taxable as a capital gain. A capital gain event is also created by trading or swapping digital assets. This includes buying NFTs using cryptocurrency.

Tax purposes require that you accurately track all crypto transactions. Declaring your capital losses will offset any capital gains tax.

Koinly, head of tax: “The biggest mistake” is not to use tax loss harvesting

Tax on Income

The income tax for cryptocurrency transactions is based on earnings from mining or stake tokens. This includes receiving cryptocurrency through an airdrop, or earning crypto interest from Decentralized Finance (DeFi) Lending.

Also, receiving cryptocurrency in exchange for labor is considered a tax event.

Tax rates on long-term cryptocurrency

Gains on cryptocurrency that have been held over a period of one year will be subject to the IRS’ long-term tax rates.

Crypto gains up to $44,625, for singles, are exempt from tax. Individuals filing as head of household, or married couples filing jointly can expect rates ranging from 0% to a maximum of 20% depending on their income tax bracket.

The table below contains more information:

Tax rates on short-term cryptocurrency

Tax rates for short-term gains, i.e. gains on cryptos held less than 365 days, will be the same as those of ordinary income tax.

The table below shows that they vary from 10% to 37% depending on the income brackets of single filers, married couple filing jointly and head of household.

When does cryptocurrency not attract tax?

Certain cryptocurrency transactions are exempt from capital gains and income tax.

  • Purchase cryptocurrency using fiat currency
  • Holding cryptocurrency without selling it
  • Transferring cryptocurrency between wallets
  • Giving cryptocurrency worth less than $15,000
  • Donating cryptocurrency to charity (this may even be tax-deductible)
  • Create a NFT (unless sold).

How to track cryptocurrency transactions

To meet your tax obligations, it is important to track and report cryptocurrency transactions accurately. Consult a professional for help. Some may only need to screenshot the few crypto transactions that they have made in a year. Others find it difficult to record crypto transactions in all Web3 ecosystems.

There are several software options that track and generate reports on cryptocurrency transactions. Popular choices include Coinly CoinLedger, and Acointing.

Here’s an easy guide on how to track and report crypto transactions.

  • Identify and organize your cryptocurrency transactions including purchases, trades and sales. List the type of asset or cryptocurrency, the date, the amount, and the value of that transaction. You should also take note of the wallet addresses.
  • Calculate your cost basis, including the price of the transaction, any fees, and other costs.
  • Calculate the gain or loss for each transaction. This is the difference between cost basis and fair market value at the time the trade or sale was made.
  • Sort your transactions into short-term (less than one year) and long-term (more than one year).

You can navigate the tax implications for your cryptocurrency investments by keeping accurate records. The IRS is constantly working on covering the “undefined scenarios” in regards to crypto taxation.

Arizona Governor vetoes Bill Targeting Taxes on Blockchain Node Hosts

Reporting Crypto Holdings on Taxes

You must then send all of your crypto transactions to the IRS in order to claim tax benefits.

Capital gains and Losses: Reporting

The Crypto Tax Form 8949 can be used to report sales and disposals, including cryptocurrency. The form is divided into two parts, Part I for disposals that are short-term and Part II for disposals that are long-term.

Check the appropriate box on the top sheet depending on whether or not your transaction has been reported on form 1099. The crypto tax Form 1099 B, which is supposed to be issued to you by the exchanges, is used to declare various types of income throughout the year. This includes income from stocks and cryptocurrency.

You will need to choose option C on Form 8949, which is applicable to short-term transactions.

You’ll need the following information to fill out Form 8949:

  • The description of the crypto assets sold
  • When you first acquired it
  • Date you sold it or disposed of the item
  • Fair market value
  • The cost basis
  • Gain or loss.

The following applies to each column of Form 8949:

After completing Form 8949, you will need to add up the total of your gain (or losses) on Schedule C.

Reporting crypto income

The Form 1040 is the most commonly used form in the United States for filing individual income tax returns. Report all crypto income, capital gains and losses on your 1040.

Form 1040 includes a crypto question.

Self-employment is defined as earning crypto through a business entity, such as by paying for labor or running a mining operation. These must be reported on Schedule A of the Form 1040.

If you want to report crypto income such as airdrops or forks, as well as other sources like wages and hobby income on Form 1040, it’s usually listed as “other income”.

Consult a professional tax advisor for advice on how to accurately file your cryptocurrency taxes and report them on your tax returns.