Back in December 2020, the breaking news appeared on the Internet: the Financial Crimes Enforcement Network had proposed to regulate cryptocurrencies, demanding exchanges to provide transaction data upon request. It made all holders wonder if they are going to become subject to some serious allegations if they don’t know how to report crypto on taxes, or don’t find out how to do it on time.
The scheme was meant to function as follows: cryptocurrency exchanges would be obliged to ask their users for detailed personal data if a single transaction value exceeded a $3,000 threshold. Even more information must be handed over to the exchange, if the wallet owner planned to engage in business operations with another private wallet owner. Of course, the exchange in question would store the data for a prolonged period of time and readily hand it over to the government.
Taxes on crypto is now a bitter reality for wannabe anarchists and liberals who dreamed about the world free from the centralized control of financial institutions. For example, Coinbase reports to the IRS. Complying to Anti Money Laundering / Know Your Customer practices, they collect sufficient personal data of their users. It obviously strips all anonymity from crypto wallets that partake in trading there.
On top of that, you might start worrying how to report crypto mining in taxes because any crypto that you mine counts as taxable income and must be reported properly.
The practice is justified because all kinds of illegal deals were paid for in crypto. The Silk Road scandal perfectly illustrates how federal services fight illegal drug trade and comes out of it. Cryptocurrencies have got a lot of bad attention because of scandals like this, and Bitcoin, as the first crypto, is not an exception.
Of course, keeping track of your digital assets would be harder for authorities if the assets are never used in any deals that can be related to your personally identifiable information. No matter how long the chain of transactions is, when assets land in a KYC-wallet, the original owner is easier to reveal. Then can you use your assets at all? And is keeping your identity unknown worth it?
How to report crypto on taxes
First things first, whether or not a certain action is taxable, depends on local legislation. The content of this article is based on publicly available documents of the US Department of the Treasury—Internal Revenue Service (IRS). Although the same taxation laws apply to all the US citizens, tax liability varies from state to state.
You’ll have to figure out the taxation laws that apply to your state of residence and your particular situation. Retrieve the latest version of documents mentioned herein from the official government websites.
Therefore, we cannot advise how to report crypto taxes in your particular case but we can point out the general direction where to look, the respective documents, and services.
For example, a typical taxable action with crypto is trading. The whole idea of trading is to make profit, right? Everything you’ve made on a price difference counts as gains and is taxable. Selling a digital coin for less than it was worth when you bought it results in a loss; losses are not taxable; on the contrary, they are deducted from the incomes.
How and where do you fill in a report about the trading activity? Here is a year 2020 Form 8949 blank. And here is an example of how to report crypto taxes in it.
How to report my crypto on my taxes
The IRS have made it quite impossible to ignore the question on the front page of the 1040 form: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
If you take the question, ‘How to report my crypto on my taxes?’ seriously then you’re out of harm. Tickle the respective checkbox, if you own some coins. Realize though, that while holding crypto is not taxable, some particular actions that result in profits are. The form itself serves as a step by step guide on how to properly take into account your operations with crypto and calculate the respective tax.
This document (the 1040 form), the abovementioned Form 8949, and the documents mentioned in them (various Schedules, for example) themselves provide a comprehensive guide on how to report taxes format crypto-wise.
Maintaining all the tax accounting can be time- and effort-consuming, it’s true. So if you have no desire to learn all the intricacies and discover how to report your crypto taxes yourself, leave it to your Certified Public Accountant, or another person approved as a tax expert.
Besides, there are plenty of online resources that aid in tax accounting. They are especially helpful when you strike dozens and hundreds of deals on KYC-compliant exchanges daily and help to automate the Form generation. Cryptotrader that we linked to above is just one of such resources.
How to report taxes crypto to crypto
Cryptic as it sounds, the headline may stand for a few scenarios:
- A transaction between your wallets;
- A donation;
- An act of borrowing.
If an abovementioned transaction involves two crypto wallets (and the same is true with fiat money), it is not a taxable event. At least in cases when private individuals are involved, not business entities. So stop looking for ways how to report taxes crypto to crypto if the transaction you are about to make is of that type.
Again, double-check the taxation conditions for your particular situation with a certified professional.
If a transaction between two personal wallets stands for a purchase, it will be taxable.
You also might be interested in ways to legally optimize crypto taxes. Forbes gave a good guide on the topic.
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