According to the IRS guidance, all cryptocurrencies are to be treated as property and not as currency. Due to this, cryptocurrencies are taxed similarly to other assets such as real estate, stocks and bonds. Crypto investors need to declare capital gains made from purchasing and selling crypto coins. In the case of capital loss, it can be used to offset their gains or income.
In 2019, the Internal Revenue Service (IRS) issued additional information about the taxation process on cryptocurrency. The timeline is listed below.
- August 2019
The IRS sent out tax notices (Letter 6173, Letter 6174 and Letter 6174-A) to over 10000 taxpayers with cryptocurrency transactions.
- October 9th, 2019
The IRS issued 43 questions and answers elaborating on the original guidance notice that came out in 2014 along with information addressing forks and airdrops.
- October 10th, 2019
The IRS released the 2019 Schedule 1 which starts off with a question, “At any time during 2019, did you receive, sell, exchange or otherwise hold any financial interest in any virtual currency?”
With a question like this in place, taxpayers will be more aware and improve the rate of voluntary compliance for cryptocurrency. The IRS has an internal system that will automatically generate notices when there is an imparity detected between the 1099-K report and the tax return report. The IRS also relies on tax practitioners to advise taxpayers and help them navigate through the process of filing crypto taxes. The use of crypto tax calculators can also greatly assist the taxpayer in this regard.
How Do I Report My Cryptocurrency Taxes?
When filing your crypto taxes, you are required to file the IRS Form 8949 which should contain a detailed record of all your taxable crypto events to authenticate your capital gains or losses for the year.
This tax form should display all your crypto trades and proceeds. For each crypto that is traded or sold, you will need to provide the date it was first acquired and the original amount it was acquired for (in USD). This will establish your cost basis and Fair Market Value. After this, you can calculate your capital gain or loss for all your trades.
Once you have calculated this, you will need to transfer the amount of your capital gains or losses to the form 1040 Schedule. It is mandatory to fill and submit these 2 forms when filing your crypto taxes.
However, this is quite a tedious process and is highly prone to errors. To avoid this, you can use a crypto tax calculator as it not only calculates your crypto taxes but also has additional features that can track all the historical prices and dates for each trade.
Why Can’t Exchanges Produce These Documents?
If you are a trader that conducts crypto activities across multiple crypto exchanges, your cryptocurrency exchanges do not have the ability to provide you with accurate tax information which is required to be filled in Form 8949. When cryptocurrency is sent from one exchange to another. The 2 exchanges involved do not maintain a record of the date and the original price (Cost Basis) for when the cryptocurrency was acquired.
For example, let’s say that you have acquired 1 Bitcoin on the Coinbase exchange and then sent that Bitcoin to the Binance exchange. On Binance, the Bitcoin was traded for Ethereum. Now each exchange has 50% of the data needed to establish your gain or loss on that trade. Coinbase has your cost basis information and Binance has your Fair Market Value information which is not shared with each other. Easily figure your binance tax and make the correct assessment archives to submit to your tax authority.
It is the responsibility of the taxpayer to keep an accurate record and maintain the historical price in fiat currency (USD) for when the crypto was initially acquired and the price when said crypto was disposed off. Using a crypto tax calculator can immensely simplify the process and is a godsend for addressing the cryptocurrency tax problem.
What are Some of the Best Crypto Tax Calculators?
TokenTax is one of the easiest crypto tax calculators on the market. TokenTax is the only crypto tax platform that is known to support every major crypto exchange. Apart from offering a crypto tax calculator service, it has additional tools that help in reporting your cryptocurrency capital gains or losses and income taxes.
They can automatically import your crypto data as they have direct connections with all the exchange platforms. In case you use an exchange that does not allow this feature, you can upload a file relating to your crypto trading data on their platform.
BearTax is considered to be an extremely simple crypto tax calculator. The platform imports all your crypto transaction data by using their integrations that span over 25 major exchanges to calculate your capital gains and can provide you with documents to file with your crypto taxes.
BearTax has a user interface which is relatively straightforward and easy to understand. They have specific tools integrated into their crypto tax calculator such as ‘smart matching.’ This tool helps you to avoid hitting negative balances which could impact the accuracy of your tax report.
ZenLedger is an all round crypto tax calculator with an easy to use interface. Integrated with all the leading exchanges, Zenledger also supports all major cryptocurrencies as well as fiat currencies.
It can calculate your crypto taxes and can automatically fill out and provide you with a capital gains report, income and donation report and closing reports. They also provide profit and loss statements for your Certified Public Accountant (CPA) or tax practitioner.