How to Record Crypto Trades for Taxes in 2023
This article answers questions like do I need to file crypto taxes? How to report cryptocurrency on taxes? How to record crypto trades for taxes?
First, Understand the Taxation Of Cryptos
- The IRS considers cryptocurrency to be property, which means that buying, selling, or exchanging it is a taxable event that usually results in a capital gain or loss.
- Earnings from crypto activities are taxed as ordinary income.
- These taxable events are reported on your tax return using various tax forms.
- Learn about crypto tax law and keep track of your transactions so that you can report all of your crypto activity to the IRS at the end of the year.
- Use the best software for recording your crypto taxes for assistance.
It should come as no surprise that the success of cryptocurrencies has attracted the attention of tax authorities. As cryptocurrency used to be a niche field for tech-savvy people, reporting and paying crypto taxes was unclear back then. Cryptos were still thought to be untaxed, so many users didn’t report. However, authorities are catching up and working hard to establish crypto taxation rules.
No matter how long you’ve been trading crypto, you must report your income and pay local taxes. However, it’s complicated. If you participate in the market, keep records and learn about crypto tax law and transaction taxes.
Why the Need To Record Crypto Trades For Taxes?
You are required to do so since doing so is mandated by law, and it is always to your advantage to maintain a positive relationship with the relevant tax authorities. Governments have recently begun to deploy technologies that make use of transparency, which is one of the primary traits that blockchain technology brings to the table.
Authorities are putting a greater emphasis than ever before on cryptocurrency, and they have begun to make it mandatory for exchanges to provide additional paperwork. The Internal Revenue Service (IRS) of the United States is likewise attempting to secure a budget boost so that it can beef up its crypto tax enforcement efforts.
You should not assume that you do not have any taxable events simply because you have not received any tax paperwork related to crypto trading. You are required to record every single one of your acts, regardless of whether or not you think the exchange reported them. If you do comply with this requirement, you risk being the subject of an audit.
Do You Have to Pay Tax On Cryptocurrency?
People may refer to cryptos as a virtual currency, but the Internal Revenue Service (IRS) doesn’t consider it a real currency. The IRS views cryptocurrencies as property, as stated in Notice 2014-21 of the IRS. If such, any capital gains or losses incurred must be reported using IRS Schedule D and Form 8949, as appropriate.
Your gains and losses from bitcoin transactions will often have an impact on your taxable income. You’ll need to pay capital gains taxes on profits you make, however, losses can be deducted to reduce the amount of taxes owed. This is the case despite the decentralized and virtual character of cryptocurrency, as the IRS views it as property.
How is Cryptocurrency Taxed?
When you buy, sell, or swap cryptos in a non-retirement account, you may encounter crypto capital gains or losses. Your gain or loss could be considered short-term or long-term, just like with other investments that are taxed by the IRS. This depends on how long it was between when you bought the cryptocurrency and when you sold it or traded it.
If you had possession of the crypto for less than a year before you spent it or sold it, any profits you made from doing either are considered short-term capital gains, which are taxed at the same rate as your ordinary income.
If you have held on to the crypto for more than a year, any earnings are considered long-term capital gains and are subject to tax rates applicable to long-term capital gains taxes.
There are additional opportunities to generate revenue through the use of cryptos. This is considered to be ordinary income and is subject to taxation at your marginal tax rate, which can range anywhere from 10% to 37% depending on your circumstances.
How Much is Crypto Taxed in the USA?
Short-term capital gains and crypto income are taxed at up to 37%, while long-term capital gains are taxed at 0% to 20%. The amount of tax you’ll pay on cryptocurrency in the United States is determined by how much you earn, the specific transaction, and the length of time you’ve held the asset.
Before you dive into US crypto tax, keep in mind that the IRS’s crypto tax rules are constantly changing.
Is any Crypto Tax-Free?
The good news is that not all cryptocurrency transactions in the USA are subject to taxation.
You will not be taxed on cryptocurrency when:
- Buying cryptocurrency with fiat currency.
- Transferring cryptocurrency between your wallets.
- HODLing cryptocurrency.
- Creating an NFT.
- Gifting cryptocurrency – as long as you haven’t reached the lifetime gift limit.
- Donating cryptocurrency to charity.
How To Record Crypto Trades For Taxes
One of the most things to keep in mind when getting started with cryptos is that it is your duty to keep track of all possibly taxable activities, as well as the fair market value of your crypto during those activities.
The IRS only provides general guidance on the records you’ll need to keep for tax reporting purposes. The agency provides examples such as keeping track of when you receive, sell, or exchange virtual currency, and the fair market value of your digital money.
Getting into the crypto space can be extremely simple, but tracking the cost basis and ensuring you’re doing it correctly is where things get tricky.
Some exchanges may issue a Form 1099-B to assist you in calculating gains and losses, but this is uncommon. Finally, you are responsible for keeping track of your taxable activities as well as the fair market value of your currency.
That will not be the case for the 2023 tax year, according to projections. Last November, President Biden signed legislation requiring cryptocurrency exchanges to issue a 1099-B. In other words, crypto exchanges will be required to directly notify the IRS of crypto transactions.
It is generally simple to track or generate reports about your transactions if you leave your virtual currency in your account on the exchange where you purchased it. You’ll need to track your crypto more if you move it between private wallets or have it in multiple places.
Use The Best Crypto Tax Software
To make the process easier, there is top crypto-focused tax software available. The software will calculate your capital gains and losses based on data from all your crypto trades and earnings across all exchanges. Some of these programs, include CoinTracker, TokenTax, and CryptoTrader.Tax, CoinLedger and others, are compatible with traditional tax software such as TurboTax or TaxAct, allowing you to easily import the gains and losses they report to your tax return.
Read for the best crypto tax software for TurboTax.
Crypto tax software allows you to keep track of all of these transactions, ensuring that you have a full list of activities to report when it comes time to file your taxes. Depending on the crypto tax software, the transaction reporting could include your tax return on Form 8949, Sales and Other Dispositions of Capital Assets, so that it can be easily imported into tax preparation software. Typically, you’ll pay for service tiers based on the number of transactions reported.
4 Best Crypto Tax Software To Record Taxes
CoinLedger is an excellent choice for anyone looking for an easy way to generate tax forms. They work with a wide range of integrations, so you can be confident that your taxes will be filed correctly.
You’ll acknowledge how simple Coin Ledger is to use – simply import your transactions, and CoinLedger will handle the rest.
Read our in-depth Coin Ledger review here.
Coin Tracker is an amazing crypto tax software that works with other well-known tax software providers such as Intuit TurboTax and H&R Block to generate tax forms easily.
Koinly is a top cryptocurrency tax software. It is ideal for those who trade across various wallets and platforms without keeping track of their purchases and sales.
It will collect data from 74 distinct wallets, over 350 different crypto exchanges, and 14 different blockchain addresses for you.
Blockpit is a free crypto tax software available for use that works with over 40 different crypto exchanges to facilitate your tax season when it comes to calculating how much you owe in taxes for all of your crypto purchases and sales.
You can use all of the above software and now you know how to record crypto trades for taxes with ease.
Why Use a Crypto Tax Software Tool?
Tax preparation is a time-consuming process. It can be difficult to keep track of all transactions when investing in crypto assets. In addition, you would have to manually calculate the tax that would apply to that specific activity. Many investors may find it to be an excessive burden.
This is where cryptocurrency tax tools come in handy. These software programmes are intended to improve transaction tracking, calculate capital gains and losses, and generate accurate reports. You might want to use a crypto tax software tool for a variety of reasons, including:
Automated Data Input
Trading in cryptocurrencies happens quickly. With crypto tax software, you don’t have to keep track of the transaction date, the number of tokens involved, their price at the time of the sale, and other details by hand.
Crypto tax software is capable of recording all data and presenting it in an easy-to-understand spreadsheet format. Furthermore, intuitive crypto tax programmes ensure that there will be few errors in computation. Expert traders, who often complete dozens of trades per day, will find this particularly useful.
Support for all stablecoins, well-known tokens, and exchanges should be one of your crypto tax tool’s top priorities. This way, you can use a single app to track all of your activities, even if you invest in multiple cryptocurrencies.
Switching between apps and manually calculating taxation on tokens that aren’t supported by a crypto tax tool is too time-consuming. Investing in highly versatile software allows you to expand your trading opportunities while not having to worry about tax calculations at the end of the year.
Another important consideration is that the software is usable where you live. Because tax laws vary by country, the app should reflect the taxation standards in your country.
Crypto tax tools include downloadable tax paperwork in addition to recording all transaction information and calculating tax. Most cryptocurrency tax software tools include pre-filled paperwork, such as IRS Form 8949, to make tax filing easier for you.
Aside from the IRS form, there are numerous other pre-filled forms available. Not only that, but these tools will usually include audit tracking, real-time gains and losses data, and other important paperwork, all while staying up to date on the most recent tax regulations.
Security and Reliability
Any software solution that deals with your profit information should be dependable and secure. A reliable crypto tax software will always generate accurate reports, keep data secure, and have a user-friendly UI where you can explore all of the features and information you require.
Choosing a reputable crypto tax software also eliminates any differences in your tax report that could result in penalties. Checking user reviews can help you determine how credible the tool is.
Set of Features
Most crypto tax software tools have their own unique set of features that will prove crucial for your crypto tax management.
For instance, a program can find transactions between your wallets. This smart transfer matching feature makes sure that you won’t have to pay taxes on transactions where you are both the sender and the receiver. Another feature is the ability to double-check transactions to prevent them from being duplicated. You can also use the tax-loss harvesting feature to save money when calculating taxable transactions.
Having access to all of these functions makes filing tax returns more efficient. Crypto tax software tools are useful not just for individuals, but also for tax professionals in managing crypto tax details for their clients.
Prepare for Tax Season When You Have Crypto
Start planning ahead of time if you want to simplify your crypto-related tax filing. Even if that’s how you usually approach tax season, don’t wait until the last minute to start gathering your reports and calculating what you owe.
If you’re just starting in cryptocurrency trading and only have a few transactions with accurate cost-basis reporting, you may be able to easily report your crypto earnings yourself using standard tax software.
Most people are fairly straightforward: they have a W-2, a couple of 1099 interest forms, and some cryptos. Therefore, they are not really in need of a CPA. However, if you’re dealing with large sums of money, such as DeFi transactions, staking, or mining operations, you’ll want to consult with a CPA about tax planning and tax-saving strategies.
How to Calculate Crypto Investment Gains and Losses?
Depending on the transaction, capital asset purchases and sales generate long-term or short-term profits and losses. The IRS treats these categories very differently, which affects your taxes.
Short-term capital gains or losses resulting from selling property held less than a year. In 2022, these profits are taxed as ordinary income at 10%–37%.
The sale of long-term assets results in long-term capital gains and losses. For 2022, long-term capital gains tax rates are 0%, 15%, or 20%.
The first step in determining whether you made a profit or loss from selling a property is to determine its cost basis. This is usually the price you paid, but you must add any transaction fees or commissions to it. After adjustments, this is your cost basis.
After that, you calculate the sale price and subtract any commissions or fees needed to close the deal.
In the final step, you subtract your cost basis from the adjusted sale to find the difference. If the difference is greater than your cost basis as adjusted, it will result in a capital gain, otherwise, it will result in a capital loss.
Using our Crypto Tax Calculator, you can estimate how much tax you may owe based on your cryptocurrency capital gains or losses.
Buying & Selling Crypto as a Kind of Investing
The purchase of cryptocurrency is not a taxable event in and of itself. You can buy and hold crypto, you don’t have to pay taxes on it even as its value rises.
When you sell, trade, or otherwise dispose of your crypto investments, you must pay taxes on the gain. This rule does not apply if you trade bitcoin in a tax-deferred account like an IRA (IRA).
For example, if you invest $1,000 in Bitcoin and then sell it for $1,200, you are required by law to report a $200 gain when you file your taxes. The gain will depend on how long you’ve held the cryptocurrency.
If you sold the same $1,000 worth of Bitcoin for $800, you would recognize a loss that could offset other gains and up to $3,000 of your taxable income.
So, if your total losses exceed your total gains, you can deduct $3,000 from your taxable income. Unused losses can be applied to future profits or up to $3,000 of your taxable income.
If you Engage in Crypto Mining
Mining involves solving cryptographic hash functions to validate and add cryptocurrency transactions to a blockchain. Miners are rewarded with crypto for their efforts in the process of creating new cryptos.
Mining cryptocurrency is considered taxable income and can be reported on Form 1099-NEC at its fair market value on the day you got it. Even without 1099, the IRS considers this taxable income, so you must report it. Furthermore, you will almost certainly be subject to both income tax and self-employment tax on this amount.
When Paid in Cryptos for Goods or Services
Bitcoin and other cryptocurrencies are now being accepted as payment by an increasing number of businesses. If someone pays you in digital currencies in exchange for goods or services, the payment is treated as taxable income in the same way that cash, a check, a credit card, or a digital wallet would be.
For tax purposes, the dollar value of the cryptos you receive in exchange for goods or services is equal to its open market value at the time and date you received it.
When You Buy, or Spend Cryptocurrency
If you mine, buy, or receive crypto and then sell or spend it, you have a capital transaction that results in a gain or loss, just like if you sold stock. This is where cryptocurrency taxes can become more complicated. When you sell crypto, you are engaging in a capital transaction that must be reported on your tax return.
Consider the purchase of cryptos that increases in value and is then used to purchase plane tickets. Paying ordinary income taxes and capital gains tax is an example.
- First, on January 15, you will receive $200 in Dogecoin cryptocurrency in exchange for services.
- Six months later, on July 15, your Dogecoin’s fair market value has increased to $500, and you use it to purchase plane tickets for a vacation.
- On your tax return for that year, you should report $200 in ordinary income and $300 in a short-term capital gain for getting the Dogecoin in January. That is the $500 value of your Dogecoin when you bought the plane tickets, less the $200 basis you received when you received the Dogecoin.
You must include $200 in ordinary income when calculating your Dogecoin basis for capital gains tax. The plane tickets are bought with the $500 Dogecoin position, so you don’t pay capital gains tax on the $200.
The initial $200 would be taxed twice as ordinary income and capital gain if you paid capital gains tax on the full $500. Thus, you deduct $200 from the $500 balance.
Tracking two cryptos is simple. Imagine buying $1,000 worth of Dogecoin, loading it onto a cryptocurrency debit card, and spending it on coffee, groceries, lunches, and more over several months.
If like most taxpayers, you view crypto as a cash alternative and don’t track capital gains and losses for each transaction, year-end taxes can be complicated. Tax reporting requires tracking these transactions.
When You Exchange One Crypto For Another
Cryptocurrency users frequently exchange or trade one crypto for another. Assume you have $1,000 in Bitcoin and want to exchange it for $1,000 in Ethereum. If you paid $300 for the Bitcoin, you must recognize a $700 capital gain when you exchange it.
You established a $300 basis for your original Bitcoin position at the time of purchase, but you realized a $700 capital gain as a result of the coin’s appreciation between your purchase and the exchange for Ethereum. Your Ethereum’s basis is its fair market value at the time of exchange, so after paying the $700 capital gain on the exchange, your new cost basis is $1,000.
It is critical to note that all of these transactions are referenced back to US dollars because this is the currency used for your tax return. So, even if you buy one crypto with another without first converting to US dollars, the transaction is still taxable.
If you Take Part in an Airdrop or Fork
An airdrop is when a new crypto project launches and distributes several free tokens to early adopters and their communities as part of its marketing campaign. You might get airdrops of new tokens in your account if you frequently use crypto platforms and exchanges. These new coins are considered a taxable event, and you must pay taxes on them.
A hard fork is a major change to a blockchain network’s protocol that makes transaction history blocks that have already been verified invalid, or vice versa. A cryptocurrency will frequently engage in a hard fork as a result of wanting to create a new rule for the blockchain. The new, improved blockchain includes the new rule, whereas the old chain does not.
After the hard fork, many old blockchain users realise their old blockchain is outdated and must upgrade to the latest blockchain protocol. All nodes or blockchain users must upgrade to the most recent version of the protocol software for a hard fork to function properly.
A hard fork doesn’t always lead to the taxpayer getting new cryptocurrency, so it doesn’t always create a taxable event. However, if a hard fork occurs and is followed by an airdrop in which you receive new virtual currency, this results in ordinary income.
This is taxable income on your tax return, and you must report it to the IRS regardless of whether you receive a 1099 form indicating the transaction.
If You Put Cryptocurrency on the Line
Receiving benefits for keeping cryptos and creating a built-in investor and user base to give the coin value is one of the goals of staking, which is a method for earning rewards for holding cryptocurrencies. The accumulation of bitcoin through staking is analogous to the accumulation of interest through the use of a savings account. You may be eligible to receive taxable income in exchange for staking your virtual currency in exchange for monetary compensation.
You should handle income from staking in the same manner as you handle revenue from mining. That is, it should be counted as its fair market value at the moment it is earned, and it should be subject to income taxes and probably self-employment taxes as well.
When you Give Donations to Charity using Crypto
If you itemize your deductions, you may be able to claim a tax deduction for the amount of cryptocurrency that you gift to qualified charitable organizations. When you donate to a charity organization, you can normally deduct the amount that your crypto is worth at the time of the contribution, and you are exempt from paying taxes on any capital gains you may have incurred.
Donations made in cryptocurrency are categorized with other forms of non-cash charity giving. If you are claiming a deduction of $250 or more for the virtual currency deduction, a charitable organization may be able to assist you in proving your crypto-charitable gift by providing a formal receipt of the donation.
Can You Avoid Paying Taxes on Crypto Transactions?
Depending on the type of transaction you make, the account you use, and whether or not you file taxes, you may be able to avoid taxes on crypto under certain circumstances.
Even if the value of the crypto increases over time, your initial purchase of it will not result in a taxable event. The decision to sell or exchange the bitcoin will trigger tax values for you, but only after that point.
When you make crypto transactions in a tax-deferred or tax-free account, such as a Traditional or Roth IRA, these transactions are not subject to taxation in the same way that they would be subject to taxation in a brokerage account.
Read more on how you can avoid taxes on crypto using very simple ways.
Do You Have To Pay Taxes on Crypto That Has Been Lost or Stolen?
On your tax return, you often cannot deduct damages related to lost or stolen cryptocurrency. According to the IRS, two different kinds of losses can occur to capital assets: theft losses and casualty losses.
In cryptos, “casualty losses” occur when a crypto is damaged, destroyed, or lost due to an unexpected event. For example, this could happen if you accidentally sent your crypto to the wrong wallet or if something else similar happened. However, other factors may need to be taken into account to decide if the loss is a casualty loss. You would suffer losses due to theft if your wallet or exchange were hacked.
In either case, you will be unable to deduct your losses from your overall gains. Between 2018 and 2025, almost no losses incurred as a result of theft or casualty will be deductible as a result of new tax legislation that went into effect in 2018. In the future, taxpayers may be eligible to benefit from this deduction if they decide to itemize their deductions rather than claim the standard deduction.
Can IRS Monitor The Use of Crypto?
The Internal Revenue Service (IRS) may still be able to monitor your crypto transactions even though they are conducted anonymously.
For instance, if you trade on a crypto exchange that enables reporting through Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, the exchange will send a report of these trades to the IRS.
In addition, the IRS uses blockchain analytics tools to identify the crypto activity of digital wallets. Also, to link such activity to individuals in situations in which the IRS has reason to think that tax evasion and/or money laundering may be occurring.
As a result, you must ensure that you declare all cryptocurrency-related activity that you engaged in during the year on your tax return.
Taxes on cryptocurrencies can be precise for some individuals, but depending on the nature of the transactions, they can sometimes be very difficult to understand. In addition, some activities can have huge financial repercussions. Even something as simple as buying a cup of coffee with Bitcoin (BTC) might have repercussions for taxation.
This article briefly discussed how to record crypto trades for taxes. Keep accurate records of every business exchange and transaction, regardless of whether or not you engage a professional to assist you with your finances.