Cryptocurrency Taxes - A Complete FAQ
- How Does the IRS Treat Cryptocurrency?
- How are Cryptocurrencies Taxed?
- When Do I Need to Report Cryptocurrency Transactions?
- How Do I Calculate My Gains or Losses?
- How Do I Report My Cryptocurrency Gains and Losses on My Taxes?
- What If I Just Buy and Hold?
- Why Can’t My Exchange Provide Me with Tax Documents?
- How Can Crypto Tax Software Like CryptoTrader.Tax Help?
Exodus partnered up with the team at CryptoTrader.Tax to help create this FAQ. CryptoTrader.Tax is a cryptocurrency tax calculator that gives you an option to import your Exodus wallet activity and can help determine your crypto tax liability.
Taxes are confusing. There’s no way around it. Layer on the depth and technical components that exist with cryptocurrencies and tax reporting gets even more complicated. This FAQ is designed to keep you informed and help you gain an understanding of how cryptocurrency taxes work in the U.S.
How Does the IRS Treat Cryptocurrency?
The IRS classifies cryptocurrencies as property for tax purposes—not as currency. This means that from a tax reporting perspective, cryptocurrencies like bitcoin are treated similarly to other forms of property like stocks, bonds, and real-estate.
How are Cryptocurrencies Taxed?
Cryptocurrencies themselves are not taxed outright. As mentioned above, cryptocurrencies are considered to be a form of property. This means that capital gains and capital losses rules apply to cryptocurrencies just like they apply to stocks.
Therefore, the income you generate from your cryptocurrency investments is taxable income.
Let’s say you purchase 0.2 Bitcoin for $2,000 in May of 2019 and then sell it two months later for $3,000. In this scenario, you have a $1,000 capital gain. This capital gain is a form of income. You report this gain on your tax return, and depending on what tax bracket you fall under, you pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain.
When Do I Need to Report Cryptocurrency Transactions?
If you incur a taxable event during the year, you will have a tax reporting requirement. The below have been taken from the IRS as to certain things that trigger taxable events:
- Trading cryptocurrency to fiat currency like the US dollar is a taxable event
- Trading cryptocurrency for another cryptocurrency is a taxable event (you have to calculate the fair market value in USD at the time of the trade)
- Using cryptocurrency to purchase goods and services is a taxable event (again, you have to calculate the fair market value in USD at the time of the trade)
- Earning cryptocurrency as income is a taxable event (from mining, staking, or other forms of earned cryptocurrency)
In short, anytime you dispose of your cryptocurrency, you are incurring a taxable event that needs to be reported on your taxes. This is exactly how the world of stock trading works as well.
How Do I Calculate My Gains or Losses?
To calculate your capital gain or loss for whenever you dispose of your cryptocurrency, you simply subtract your cost basis in the asset from the fair market value. The equation below shows how this works.
Fair Market Value - Cost Basis = Capital Gain/Loss
How Do I Report My Cryptocurrency Gains and Losses on My Taxes?
To report all of your capital gains and losses, you need to complete IRS Form 8949 (pictured below). This form details each of your cryptocurrency taxable events.
On Form 8949, list all cryptocurrency trades and sells along with the date you acquired the crypto, the date sold or traded, your proceeds (Fair Market Value), your cost basis, and your gain or loss. Once you have each trade listed, total them up at the bottom, and transfer this amount to your 1040 Schedule D. Include both of these forms with your yearly tax return.
Software built for calculating your crypto taxes can automatically build these tax reports for you. Historical prices, dates, and fair market values for all of your trades and transactions will be retrieved automatically by the software.
What If I Just Buy and Hold?
If you buy crypto and do not dispose of it, you have not incurred any taxable events and thus don’t have to report any capital gains or losses on your taxes. Keep in mind if you traded one crypto for another, you will need to report these trades.
Why Can’t My Exchange Provide Me with Tax Documents?
Cryptocurrency exchanges like Coinbase, Binance, and Kraken lack the ability to give accurate and complete tax documents to their users. It is not their fault however, as it stems from the transferability of cryptocurrencies.
By nature of the blockchain technology that exchanges are built on, users can send Bitcoin and cryptocurrencies from one wallet to another, irrespective of the original exchange or platform. Because you can send cryptocurrencies from other platforms onto exchanges like Coinbase at any time, the exchange itself has no possible way of knowing how, when, where or at what cost you acquired that cryptocurrency that you sent. The exchange, or Coinbase in this example, only sees that it showed up in your Coinbase wallet.
This means that anytime you move crypto assets off of, or onto, an exchange like Coinbase from another location, Coinbase completely loses the ability to provide you with tax information that you need for capital gains and losses reporting. This is because the exchange has no way of identifying what your cost basis is in that certain cryptocurrency, which is an essential piece to figure out your capital gain or loss. This is true of all other major cryptocurrency exchanges.
The solution to this problem is to aggregate all of your cryptocurrency data across all of the platforms you use so that you can then build your holistic tax reports.
How Can Crypto Tax Software Like CryptoTrader.Tax Help?
Cryptocurrency tax software tools integrate directly with exchanges, wallets, and native crypto platforms to allow users to pull in all of their historical transactions. With this data, the software can generate your required tax reports. As seen in the video below, CryptoTrader.Tax natively integrates with Exodus so that users can import transactions and generate their needed tax reports with the click of a button.
Information provided is for informational purposes only and should not be considered financial advice. Investing in crypto assets is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Past performance is not indicative of future results.