In its official guidelines, the Internal Revenue Service (IRS) has specifically confirmed that all kinds of cryptocurrencies are not to be regarded as virtual currencies but as property for taxation purposes instead. This refers to all cryptocurrencies, including XRP, Bitcoin, Ethereum, Ripple, Litecoin, etc. Such crypto-coins would be regulated in the same way as other types of property such as real estate, securities, gold, etc.
If you happen to be a crypto-trader who has intentionally failed to disclose your crypto-taxes, it would be considered a criminal act and a serious offense. Note, however, that not all activities surrounding cryptocurrencies are taxable.
More About Taxable And Non-Taxable Events
Recall that a taxable event is an occurrence that creates a tax reporting obligation, i.e., whenever a taxable event happens, a capital gain or capital loss will have to be registered on the tax returns. A taxable case is when any of the following crypto-activities occur, as per the IRS guidelines.
- It is considered a taxable event when you exchange cryptocurrency for fiat money (Bitcoin to USD).
- When exchanging for other cryptocurrencies (Bitcoin to Litecoin) cryptocurrency; At the time of exchange, Cryptocurrency traders would need to measure the Fair Market Value (FMV) at USD.
- If cryptocurrency is obtained as an income source (by mining or other means of income).
- If buying products or services with cryptocurrency (Fair Market Value measurement in USD at the time of the exchange).
Traders must remember what constitutes as a non-taxable activity as they go through how to report crypto taxes. It happens when the crypto-activities occur, as mentioned below.
- Whenever a crypto-trader transfers cryptocurrency among crypto exchanges or virtual crypto-wallets without causing a capital gain or loss.
- It is not taxable when cryptocurrency is obtained as a present/gift.
- Buying and owning cryptocurrency is not a taxable activity because there will be no capital gains or losses until you transfer or sell your cryptocurrency.
Accurate Tax Reports
If it comes to how to report crypto taxes in the correct way, you can find that perhaps the data given by your crypto exchange is inconsistent. If you’re a crypto trader who moved crypto in and out of exchanges, your initial cost basis becomes unknown. It is due to the crypto exchange not understanding how, when, where and at what cost the cryptocurrency was initially purchased for.
Only depending on what shows in your account will your exchange provide you with the details. When the asset is passed to another exchange, there is a lack of the opportunity to provide precise information on fair market value and cost base. All of these components are needed to calculate your crypto taxes by using a crypto tax calculator.
Using a crypto tax program is advisable when you start the process of how to report crypto taxes. These tools can import all your crypto data from multiple platforms and can measure your cost structure and FMV accurately. It will reduce the risk of error and fasten the calculation process for your crypto taxes.
Regardless of whether you invest in crypto via a Bitcoin ETP, use bitcoin for remittance purposes, or save in the digital currency using a Bitcoin savings plan, if a taxable event occurs, you need to track it.
Winning money in a bitcoin casino, however, is typically not a taxable event. Although, it’s best to check what the law says in your local jurisdiction.
Best Crypto Tax Software
Using tax tools like BearTax will significantly simplify your crypto-complication when you go through how to report crypto taxes. BearTax was launched in 2018 and has benefited a great deal from cryptocurrency small-scale businesses. It supports more than 40 significant crypto exchanges, with few of its key features being the following.
- Direct importing of CSV files
- Cryptocurrency traders are given High-Frequency Trading (HFC) bots
- Known for supporting limitless transactions
- It has been integrated with various cryptocurrency exchanges
When you’re a crypto trader and going on about how to report crypto taxes, CryptoTrader.Tax is both a crypto tax app for beginners and experienced traders alike. Several of its main features are outlined below.
- IRS Form 8949 compliant
- Report on capital gains
- Reports on cryptocurrency revenue
- ability to directly import with TurboTax
- Ability to generate audit reports
ZenLedger began in 2017 and rapidly grew to be one of the market’s strongest crypto-tax software. ZenLedger supports over 18 major crypto exchanges, which are favored by many crypto traders for its simple user interface and exemplary capabilities. Any of their main characteristics are as follows.
- Can generate audit reports
- Generate tax-loss harvesting reports
- Traders have the option of choosing their preferred method of accounting
- Financial Crimes Enforcement Network alerts.
- Ability to calculate the cryptocurrency obtained via mining
Bitcoin.Tax was introduced back in 2014, the IRS issued the first guidelines on cryptocurrencies that same year. Several crypto traders have confirmed that when it comes to “how to report crypto taxes?”, this is one of the strongest crypto tax software. Currently, it supports more than 20 big crypto exchanges. Listed below are some of the unique features of Bitcoin.Tax
- Crypto mining information can also be imported directly.
- Calculation and reports of Fair Market Value data, cost base, and capital gains.
- Can generate the report for IRS Form 8949
- CSV files can be imported from crypto exchanges
- LIFO and FIFO accounting method options
Bitcoin.Tax has no free version of the crypto-tax app. The price begins for the basic tier at $29.95 annually and rises to $399.95 for its highest version, which comes packaged with several added features.