If you’ve done any trading in cryptocurrency exchanges, you may have earned capital gains, which is considered a taxable event and must be reported to the IRS. If you’ve suffered capital losses instead, you still want to report crypto losses to the IRS so as to lower your tax liability. To get started, begin with IRS tax Form 8949, which is used to report sales and exchanges of capital assets, which includes cryptocurrencies.
It wasn’t until 2023 that the Internal Revenue Service (IRS) began officially requiring cryptocurrency exchanges to report crypto transactions on 1099 forms to both the IRS and the taxpayer. Prior to that, even though you were still supposed to report capital gains and losses, many individuals and crypto exchanges did not. Now the IRS is cracking down, so it’s important to know how to properly report crypto capital gains and losses.
Read on to learn how to properly report crypto capital gains and losses, the tax forms you need to fill out, and how to determine if you have a taxable capital gain or loss.
Who needs to file crypto tax Form 8949
If you haven’t earned any net capital gains from crypto transactions, you are not considered to have any taxable gains. However, whether you show a capital gain or loss, you’ll need to fill out Form 8949 to declare crypto taxes, which you may realize in one of two ways.
- Buying and selling the digital asset through a taxable account for crypto earnings
- Buying or selling goods and services in exchange for cryptocurrency
“Suppose you use cryptocurrency for purchases or payments. In that case, it’s treated as a barter transaction, and legally, you must report the fair market value of the goods or services you received as income on your tax return. Same thing if you get paid in cryptocurrency. That income is also subject to taxation,” explains Subramanian.
For example, if you use 1 Bitcoin (BTC) to purchase a new computer worth $2,000, you must report $2,000 as income in your tax return.”
If you show capital losses on cryptocurrency exchanges in the tax year, you also need to report those capital losses to the IRS, says Subramanian.
“If you sell or exchange your cryptocurrency at a loss, you can claim a capital loss on your tax return. This can offset any capital gains you may have and lower your overall tax bill by up to $3,000.”
NOTE: It’s important to mention that the only time you don’t have to file crypto taxes even if you show a net capital gain is if you hold the cryptocurrency in a tax-advantaged account like an individual retirement account (IRA). This isn’t terribly common, but it’s something to be aware of.
How to report crypto capital gains
When you begin filling out your tax return, the IRS will ask, on Form 1040: “At any time during (tax year X), did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” Everyone is required to answer the question, whether it’s yes or no.
If the answer is yes, proceed to Form 8949 to figure out how your cryptocurrency exchanges will affect your income taxes. After that, you’ll enter that data into Schedule D, which will calculate your net capital gain or net capital loss.
On Form 8949, you’ll need to fill out the dates when you bought and sold the digital assets. This is because how long you held the cryptocurrency will determine how much tax you have to pay depending on if you realized short-term capital gains or long-term capital gains.
Long-term capital gains vs. short-term capital gains
The capital gains tax rate for crypto capital gains is the same as it is for other capital assets like stocks or other investments or property as defined by the IRS. But the rates vary depending on whether you show long-term capital gains versus short-term capital gains.
Short-term capital gains are when assets are held for one year or less. In that case, any capital gains you earn are taxed as ordinary income, meaning you’ll be taxed at the same rate as at your job. The tax rate for ordinary income is anywhere from 10% to 37%, depending on how much you make. You will report any short-term transactions on Part 1 of Form 8949.
Assets held for more than a year that generate a net capital gain are considered long-term capital gains, and while still considered taxable income, they’re taxed at a lower rate. If you’re below a certain income level, the tax rate is 0%, but it will never be more than 15% or 20%. If you have long-term investments in digital assets, those will be reported on Part 2 of Form 8949.
Fill in crypto transaction details
Once you’ve figured out if you’ve had long or short-term transactions, you can fill out Form 8949 with the following information for each individual crypto asset.
- Name and description of digital asset that was exchanged, sold, or spent
- The date you bought the digital asset you’re using as the cost basis
- The date you sold, exchanged, or spent the digital asset
- The proceeds from the sale or disposal of the crypto asset (in U.S. dollars)
- Your cost basis, which is the gross value (in U.S. dollars) at which you purchased the capital asset, including any exchange fees or transaction fees
- Any adjustments to the gain or loss of the digital assets (which is not typical of digital currency)
- The gain or loss you showed from the sale of each digital asset, which is calculated by subtracting the cost, or cost basis, from the proceeds, or sales price
Fill in Schedule D
After you’ve completed Form 8949, you’ll take that information and transfer it to similar sections on Schedule D, where you’ll subtract your cost basis from your total proceeds to figure out your net capital gain or loss. Schedule D will then determine how much tax liability you owe (if you showed a net capital gain), or how much tax deduction you can take (if you show a net capital loss.
Are there other taxable events from crypto transactions?
While reporting a crypto capital gain or loss is most common, you can also make crypto income from events such as mining, staking, hard forks, and airdrops, which is considered “ordinary income” for tax purposes. This income should be reported on Form 1040, Schedule 1 “Additional Income and Adjustments to Income” under “Other Income.” If you have any questions, talk to a tax professional.
What if my employer pays me in crypto income?
If you receive crypto income from a W-2 employer, your cryptocurrency taxes are the same as what you would be taxed on for “ordinary income,” meaning the crypto income is subject to federal and state taxes (where applicable), Medicare, and Social Security. And your employer should pay your wages based on the fair market value of the crypto on the day you receive it.
If you are a contractor or freelancer and receive crypto income as payment, that is considered self-employment income, and you will need to claim that cryptocurrency income on your tax return. In this case, you yourself will owe taxes on the crypto income, and you’ll also be responsible for paying self-employment taxes on your earnings. For crypto self-employment income, use tax forms 1040 and Schedule C on your tax return.
What are the tax implications if I make a charitable contribution with cryptocurrency?
If you make a charitable donation to a qualified organization using digital currency, you can claim a charitable contribution deduction on your tax return, explains Lisa Greene-Lewis, a CPA and tax expert with TurboTax.
In the case you’ve held the virtual currency for more than one year, your deduction should be the same as the market value of the virtual currency at the time of the donation. If you hold it for a year or less, then your deduction will be either your cost basis or the crypto’s fair market value at the time you make the donation, whichever is less, Greene-Lewis explains.
What will happen if I don’t report cryptocurrency on taxes?
If you don’t report cryptocurrency transactions (that resulted in either a capital gain or loss), on your tax return, you may be subject to fines, interest, and penalties. In extreme cases, you could also face criminal charges or jail time if you’re notified of failure to pay crypto taxes and still don’t report crypto capital gains and losses.
- Cryptocurrency tax reporting is required by the IRS, just like other capital assets, regardless of whether or not you receive a 1099 in the mail.
- You can claim crypto capital gains and losses using tax forms 8949 and Schedule D.
- Short-term capital gains are assets you’ve held for one year or less; long-term capital gains are those whose holding period was longer than one year.
- If you claim crypto losses rather than capital gains, you can lower your overall tax liability by up to $3,000 per tax year.
- IRS – About Form 8949 — IRS
- IRS – Reminder on Virtual Currency Transactions — IRS
- IRS – Form 8949 — IRS
- IRS – Form 1040 Schedule D — IRS
- SuperMoney – Understanding Tax Rate on Crypto Capital Gains
- SuperMoney – Cryptocurrency vs. Gold: Inflation Hedge
- SuperMoney – Cryptocurrency vs. Gold: Inflation Hedge
- SuperMoney – Optima Tax Relief Review