In recent years, the Internal Revenue Service (IRS) has been enforcing cryptocurrency taxation. They have asked crypto exchanges such as Coinbase to hand over crypto data about certain crypto traders through specific crypto addresses.
It is advisable for anyone who is dealing in cryptocurrency to start reporting their crypto taxes in order to avoid any issues in the future. The IRS can issue crypto traders with hefty fines and even a jail term in certain situations if you fail to report accurate information in your tax documents.
To make the process of how to file crypto taxes much easier, there are a host of online tools available that can help to determine how much taxes a crypto inverter must pay. Bitcoin tax calculators are now cropping up everywhere online to ease the tax filing process. Before you start the calculations for your crypto trades, you need to first understand what crypto activities are deemed as taxable and non-taxable.
What are the Taxable Events for Cryptocurrency?
A taxable event is defined as an event where a tax reporting liability is triggered. When these taxable events occur, a capital gain or capital loss will be realized. This is required to be reported on your tax returns.
The first set of IRS guidance was issued in 2014, it was here that the IRS stated all cryptocurrency is to be treated as assets or property for tax purposes. If you have conducted any of the following crypto activities, you will need to report them.
- When a crypto trader is involved in trading cryptocurrency to fiat currency (USD).
- When a crypto trader carries out a trade where cryptocurrency is exchanged for another type of cryptocurrency. (the fair market value will have to be calculated at the time of the trade).
- When a crypto trader uses cryptocurrency to purchase goods and services.
- When a crypto trader has earned cryptocurrency as a source of income, it is a taxable event (this includes activities such as mining or other forms of cryptocurrency).
What are the Non-Taxable Events for Cryptocurrency?
- When a crypto trader gives cryptocurrency as a gift, it is not deemed as a taxable event.
- When a crypto trader transfers cryptocurrency of the same type between different crypto exchanges or digital wallets without any capital gains and losses being realized.
- When a crypto trader purchases cryptocurrency with fiat currency such as USD. It is not a taxable event as no gains are realized until the cryptocurrency is traded, used or sold.
What are the Challenges Faced by Crypto Traders?
When it comes to the process of how to file crypto taxes, the calculation of the Fair Market Value (FMV) is the most difficult part as many crypto traders face problems with the accuracy of their FMV results. Certain traders who have been trading cryptocurrency over a period of months and years have failed to keep a record of the dollar value or FMV at the time it was traded for or purchased.
The Fair Market Value is essential for crypto traders to accurately calculate and file their tax reports in order to avoid problems with the IRS. Each trader must have a detailed record of each crypto trade that they have conducted as depending on the volume of trades, it may be potentially impossible to do by hand and can become an extremely tedious process that is also highly prone to errors. The FMV is necessary to precisely calculate a trader’s capital gains.
To aid with the process of how to file crypto taxes, there are now many crypto tax calculators that can easily perform the calculation for each of the hundreds of trades that have been done. The crypto calculators immensely ease the taxation process by automating the calculation tasks and also the generating of reports, these tax calculation software can automate the entire tax reporting process if needed.
The IRS Forms Needed When Filing Crypto Taxes
When going about how to file crypto taxes, there are 2 main forms that need to be filed. These are IRS form 8949 and 1040 Schedule D. Start by listing all the cryptocurrency trades onto Form 8949 as well as the date it was originally acquired for, the date it was sold or traded and the proceeds (Fair Market Value).
The cost basis, capital gain or loss will also need to be mentioned in the form. Once all the crypto trades have been listed, proceed to total the sum at the bottom and transfer the amount to the next form, 1040 Schedule D. Both these forms must be attached with your other yearly tax documents.
How to File Crypto Taxes Using Softwares like ZenLedger?
When it comes down to the process of how to file crypto taxes, using the help of a tax calculating software can ensure that you don’t make any errors in your report. A well-renowned tax calculator such as ZenLedger has inbuilt support for all major crypto exchanges and fiat currencies (USD). It can also generate tax reports such as donation reports, income reports, capital gains reports, and closing reports.
ZenLedger has the ability to provide the crypto taxpayer with their profit/loss statements and also allow their Certified Public Accountant (CPA) access to these documents if required. It is designed in such a way that the entire process is much more straightforward and streamlined.
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