How Do I Answer the Crypto Tax Question on Form 1040? (Updated 2023) | CoinLedger (2024)

FAQs

How Do I Answer the Crypto Tax Question on Form 1040? (Updated 2023) | CoinLedger? ›

On your 2023 federal tax return, you must answer "Yes" or "No" to a digital asset question: At any time during the tax year, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

For example, an investor who held a digital asset as a capital asset and sold, exchanged or transferred it during 2023 must use Form 8949, Sales and other Dispositions of Capital Assets, to figure their capital gain or loss on the transaction and then report it on Schedule D (Form 1040), Capital Gains and Losses.

This is a broad question that you would have to answer yes to if you have touched crypto in any form, even if you just held bitcoin the IRS want to monitor this for future years when you do sell. Crypto taxes are a voluntary system, you are supposed to volunteer information about your trades and how much you owe.

Finding your cost basis

This refers to the original value of an asset for tax purposes. In order to calculate crypto capital gains and losses, we need a simple formula: proceeds - cost basis = capital gain or loss. Note that two additional variables may affect your cost basis: accounting method and transaction fees.

For crypto income, on the prepare your 2023-24 return (step 4) page, select add/edit next to other income. Next to any other income, select add. In the drop down menu under type of payment, select other. For the description, write a description of your income - for example, staking rewards.

You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.

Provide the details of your crypto gain/loss on Form 8949

Every transaction requires the same pieces of information, entered in either Part 1 (for short-term transactions) or Part 2 (for long-term trades), in the relevant column.

You owe taxes on any amount of profit or income, even $1. Crypto exchanges are required to report income of more than $600, but you still are required to pay taxes on smaller amounts. Do you need to report taxes on Bitcoin you don't sell? If you buy Bitcoin, there's nothing to report until you sell.

If you are filing a joint return, complete as many copies of Form 8949 as you need to report all of your and your spouse's transactions. You and your spouse may list your transactions on separate forms or you may combine them.

What is the crypto question on tax return? ›

In fact, one of the first questions on Form 1040, which is used by most people to file their tax returns, asks the following: “At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest ...

Crypto-specific activity that might trigger an audit includes: Failure to accurately report crypto transactions and income. Large transactions or significant gains. Inconsistencies or discrepancies.

Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120 and 1120-S must check one box answering either "Yes" or "No" to the digital asset question. The question must be answered by all taxpayers, not just by those who engaged in a transaction involving digital assets in 2023.

Complete Form 8949 to document your cryptocurrency transactions. Transfer the totals from Form 8949 to Schedule D of your tax return. Report any ordinary income from cryptocurrency on Schedule 1 of Form 1040 unless you're self-employed, in which case you should use Schedule C.

Cost basis = Purchase price (or price acquired) + Purchase fees. Let's put these to work in a simple example: Say you originally bought your crypto for $10,000 (including $35 in transaction fees). Even though you only hold $9,965 worth of crypto after fees, your total cost basis is what you paid to acquire that crypto.

Provide the details of your crypto gain/loss on Form 8949

On Schedule D, you'll subtract your cost basis from the total proceeds to arrive at your total capital gain or loss. From there, Schedule D will determine how much tax you owe or what kind of deduction you receive.

You owe taxes on any amount of profit or income, even $1. Crypto exchanges are required to report income of more than $600, but you still are required to pay taxes on smaller amounts. Do you need to report taxes on Bitcoin you don't sell? If you buy Bitcoin, there's nothing to report until you sell.

The tax rate that you pay on cryptocurrency is dependent on multiple factors, such as the length of time you've held your crypto and your personal income bracket. Where do I enter crypto on TaxAct? Cryptocurrency gains and losses should be entered in the 'Investment Income' section of your TaxAct account.