Cryptocurrency is no longer a buzzword or a fringe investment. Millions of people and small businesses hold or use crypto in some capacity. But when it comes to filing taxes, reporting crypto gains and losses can get confusing fast. In today’s post, I’ll walk you through what you need to know to accurately report cryptocurrency and avoid red flags with the IRS.

Is cryptocurrency taxable?

Yes. Cryptocurrency is treated as property for tax purposes. This means that buying, selling, trading, or using crypto can trigger a taxable event just like when you buy or sell stocks or real estate.

In other words, you must report crypto transactions on your tax return. This is true even if you didn’t receive a Form 1099, which many crypto exchanges still don’t issue consistently.

What types of cryptocurrency transactions do I need to report on my taxes?

There are two main types of taxable events when it comes to crypto:

1. Capital Gains or Losses
2. Ordinary Income

Capital gains or losses occur when you sell or trade crypto. The difference between what you paid (called your “cost basis”) and what you sold it for is your capital gain or loss. These gains or losses take place when you trade one cryptocurrency for another or when you use crypto to purchase goods or services.

However, if you receive crypto as payment, then the amount should be included in your ordinary income. This could happen when you receive crypto as payment working as an individual or as a business, when you mine or stake rewards, or when you receive crypto through airdrops or when a fork occurs.

How do I report capital gains and losses of cryptocurrency?

Just like you would with any other capital gains or losses, you’ll report them on your annual tax return. You’ll reconcile your gains and losses using Form 8949, and then you’ll report the amounts on your Form 1040, Schedule D.

An important thing to keep in mind when it comes to capital gains is that the amount of taxes you’ll pay on your gains depends on if it is considered a short-term capital gain or a long-term capital gain. Short-term capital gains are gains on investments you’ve held for less than a year, and those are taxed at your ordinary income tax rate.

If you instead hold the investment for more than a year, it would be considered a long-term capital gain and is taxed at a more favorable rate. 

One important note here is that even if you sold your crypto at a loss, there are 3 tax steps you can take to try and recoup some money:

1. Use your capital losses to offset any capital gains you had in the same tax year.
2. If your capital losses exceed your capital gains, deduct up to $3,000 in capital losses against your ordinary income for the year.
3. Carry forward any additional capital losses to future years.

How do I report cryptocurrency income as a small business owner?

If you accept crypto payments for goods or services that you provide, then that income is considered business income just like any other cash or credit payment. You’ll report the payment as part of your gross income on your Form 1040, Schedule C or Form 1120-S if you own an S-Corporation.

Additionally, if your business later sells any cryptocurrency received as income, then you’ll also need to report any capital gains on that transaction.

What records do I need to keep for cryptocurrency transactions?

As I said earlier, some crypto exchanges don’t provide detailed records when they process transactions for you, so it’s important that you keep your own accurate records to use at tax time (trust me, your accountant will thank you!).

For every crypto transaction, make a record that includes the following:

• Date of acquisition or date of sale
• Amount
• Type of crypto (Bitcoin, Ethereum, Tether, etc.)
• Fair market value at time of acquisition or sale
• Cost basis (what you paid for it)
• Transaction fees

What are common tax mistakes involving cryptocurrency?

There are 3 common mistakes people make when it comes to reporting crypto on their taxes:

1. The most common mistake I’ve seen is people not converting crypto to U.S. dollars (USD) when reporting it on their taxes. Don’t miss that step!
2. People have heard (and believe) the myth that crypto-to-crypto trades aren’t taxable. This isn’t true in the U.S. because the IRS treats crypto as property, so when you exchange one cryptocurrency for another, it’s considered a disposal of the first asset and an acquisition of a second asset. If you have a gain or loss from this exchange, then you’ve triggered a taxable event and need to report it on your taxes.
3. Another thing to remember is that staking or mining income is still considered income, so you’ll have to report that income amount as its fair market value in USD on the date and time you received it.

Abridged by Amy

The IRS has been increasing its scrutiny and cracking down on crypto underreporting. Even if you think your transactions are minor, it’s better to report them accurately than to risk the penalties you may incur down the road. 

Additionally, if you’re a small business owner who accepts crypto or is doing more complex DeFi transactions, it’s important to consult a CPA who can help make sure you’re not missing any steps with the IRS.