In order to report crypto on your taxes, you’ll need to understand a few key details about how it works. In this article, we’ll walk through how cryptocurrency is categorized by the IRS, how to calculate it into your taxes, and what forms you will need. Because regulations are constantly evolving, it’s best to work with an accountant with cryptocurrency expertise.
How do I know whether to report crypto on taxes as personal or business?
Trading crypto personally is frequently called hobby trading, crypto hobby, or cryptocurrency as a personal hobby. People who engage with crypto on a personal hobby typically trade through Coinbase, Kraken, Gemini, Bisq, and Binance, and others. Crypto can now be traded through some traditional brokerages, including Robinhood and E-Trade, with more expected to follow. Even if you are trading or mining as a hobby, there are tax benefits to setting up a crypto business.
If you are running a crypto business, that typically means you are:
- Business trading cryptocurrency or virtual assets
- Mining cryptocurrency as a business
- A software company assisting with blockchain support services
- A business involved in cryptographic ledger
- A business distributed ledger or public ledger
- Any business involving smart contracts, blockchain, and all other aspects of cryptocurrency and virtual assets.
It’s best to speak with a qualified cryptocurrency accountant to ensure you are filing appropriately.
How is cryptocurrency categorized?
Because it is used for exchange of goods, most people assume cryptocurrency is classified as income, in the same way that US dollars are, but that’s incorrect. Cryptocurrency is categorized as a personal asset.
Personal assets include things like savings accounts, retirement accounts (like an IRA or 401k), certificates of deposit, money market accounts, treasury bills, and stocks. It can also mean property, land, a house or structure, vehicles and boats, furnishings, computers, and jewelry.
Since cryptocurrency is considered a personal asset, how is it taxed?
Like your other personal assets, cryptocurrency is subject to capital gains tax.
Calculating your capital gains tax can be complicated, so we recommend starting by checking out our article, How to Calculate Capital Gains Tax in the US or Canada, but because calculating capital gains on cryptocurrency gets complicated and depends on your circumstances, we really recommend chatting with a cryptocurrency accountant.
How do I file forms that disclose my cryptocurrency gains to the IRS?
There are three forms that can cover your cryptocurrency (virtual asset) reporting when you prepare your Taxes and get them ready for the IRS.
- Form 8949
- Schedule D
- Form 1099-B
Form 8949, which reports sales and exchanges of capital assets. On this form, you’ll report gains from sales or exchanges of your Bitcoin (or other altcoins).
You will also need a Schedule D and Form 1099-B, which brokerages provide to taxpayers. Schedule D is where you’ll report gain or loss transactions.
Filing Cryptocurrency Taxes as a Business
If you run a cryptocurrency business as a DBA, Sole Proprietor, LLC, Partnership, S-Corporation (S-Corp) or C-Corporation (Inc), in addition to the above forms, you may also need:
- 1040 Schedule 1 or 1040 Schedule C
- 1065 for Partnership Returns
- 1120S S-Corporation Tax Return
- 1120 C-Corporation Tax Return
Depending on whether you use crypto as a business and whether you have a business entity set up for a mining business, you may need to file a 1040 Schedule 1 or 1040 Schedule C. The 1040 Schedule 1 is where you’ll add deductions and exclusions, while the 1040 Schedule C is used for sole proprietors operating a business. There can be big tax benefits to setting up a business entity for your crypto business. Other business entity types must report their assets
It does get complicated, but don’t worry, our experts are happy to talk you through it!
How do I ensure I am filing properly and paying correct fees?
The best way to ensure you are paying your full tax liability, keeping as much of your income from crypto as possible, and not facing unknown fines and penalties is to work with an accountant that specializes in crypto. Because the IRS continues to change regulations, forms, rates, and requirements to keep up with this rapidly-evolving form of currency, it’s important to read directly from the IRS what is required. Taxes are always complicated, and adding crypto to the mix can elevate this complication if you have multiple forms you have to report and add that to Rental properties and Schedule C and E to cause even more confusion on what to report where. Working with an expert will give you not only peace of mind, but a trusted source of guidance for crypto tax strategy moving forward.
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Cryptocurrency is also known as Bitcoin, virtual assets, Litecoin, Dogecoin, Ethereum, Monero, Ripple, Steam, IOTA, NEO, and others. Purchasing and Trading of cryptocurrency can occur at exchanges such as Coinbase, Kraken, Gemini, Bisq, Binance and others.
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