Unless you have been living under a rock for the last few years, you know about cryptocurrencies. You probably either think it’s the new standard for currencies worldwide, or you think it’s akin to gambling. But regardless of what side of the crypto debate you are on, this new magic internet money is here to stay. However, for all crypto holders and doubters alike, it’s important to know how it is taxed according to the IRS.
How Does the IRS See Cryptocurrencies?
According to the Internal Revenue Service, Bitcoin and other cryptocurrencies are seen, as well, currencies. It’s funny that it is classified that way because most people view it like a stock, to be sold and bought for a profit. However, the classification makes sense because after all it’s a currency and currencies are considered property. Its kind of the same concept of a foreign currency exchange. For example like having to report the value change when you exchange US dollars for British Pounds.
What About Wash Sales?
As I stated above Bitcoin is seen by the IRS as property and not a security. Wash sales refer to the “washing” of securities that arises from selling a stock and buying right back in a short timeframe. This “wash sale” invokes the wash sale rules. And the losses from that said stock cannot be claimed as a capital loss on one’s taxes. Luckily for crypto seller/traders this rule is not in effect for cryptocurrencies. As it stands in 2024, wash sales do not apply to cryptocurrencies but that may change soon.
Where Do I Report Cryptocurrency Sales on My Tax Return?
Well like all other capital asset sales, you report it on Schedule D. Depending on how long you held the asset you would either report it as short term or long term. Generally, any asset held over 1 year is considered long term and anything less than 1 year is short term. Also, something to keep in mind is whether the basis is reported to the IRS. Normally on consolidated 1099’s that come from a brokerage account, the basis of almost all transactions reported to the Internal Revenue Service. However, to the extent of my knowledge, there isn’t crypto exchange that reports crypto trades to the IRS. This will affect which box you check on Form 8949.
Form 8949?
Think of this form as the backbone of Schedule D. This form is to report the disposition of capital assets, which includes cryptocurrencies. To fill this form out for assets not reported to the IRS, check off Box C on part 1 of Form 8949. After that, then proceed to enter in the asset name (coin name essentially), the proceeds (what you sold it for) and the basis (what you bought it for). After that, calculate the gain and add up the totals of all the columns. Then, put those totals for proceeds, basis, and gains/losses, on Schedule D. And finally, fill out Schedule D like you would normally do on a tax return and be sure to follow the directions on the form. Once Schedule D is completed be sure to report the result on your 1040 and state tax returns.
Make Sure to Keep Good Records
This is essential for all good tax reporting. You should ideally be able to download all transaction activity for the exchange that you traded the cryptocurrency out of. For example, Robinhood will include crypto trades on its’ own 1099. And Coinbase (one of the largest crypto exchanges in the world), will have a handy Excel file that is available to download. This file will state what the proceeds, basis, dates sold and bought, of each transaction. Be sure to calculate the gain and report it on Form 8949 and Schedule D on your tax return.
In Summary
In summary the best way to properly report your crypto gains/losses is to get all data and properly categorize it. After categorizing everything you can just hand it off to an accountant. But for your knowledge, cryptocurrencies are currently considered property and a capital asset as opposed to a security and should be reported as such on Form 8949 and Schedule D. If you happen to need an accountant that knows how to report crypto gains and losses, it just so happens that I know just how to report them, so feel free to contact me for efficient tax preparation. Also as a disclaimer, Bitcoin and other cryptocurrencies are highly speculative. This isn’t financial advice nor is this investment advice in any way, shape or form. Before making any investment do your own research before making investments.