In this article:
- Why You Need to Report Crypto Sales to the IRS
- Other Crypto Transactions You Need to Report to the IRS
- How to Report Crypto Transactions to the IRS
Selling or trading cryptocurrencies won't trigger a tax audit, but you still need to report your crypto gains or losses to file an accurate tax return. If you underreport your income—including taxable crypto gains—and are audited, you may have to make up the difference in required income taxes, plus penalties and interest.
Why You Need to Report Crypto Sales to the IRS
You need to report the sale of crypto to the IRS because the IRS treats crypto as property. When you sell crypto, the difference between the sale price and the asset's adjusted cost basis (often, the price you paid plus fees) will be your gains or losses. You need to report these to file an accurate tax return.
The resulting capital gains taxes you'll pay can depend on your overall taxable income for the year and whether you held the crypto for at least a year before selling. Crypto profits are taxed differently depending on how long you held on to the asset before realizing a gain. If you lost money on your crypto, you can deduct the losses from other capital gains and up to $3,000 of ordinary income each year.
Other Crypto Transactions You Need to Report to the IRS
The IRS asks taxpayers, "At any time during [the year], did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?" You must answer the question accurately or risk legal consequences.
The IRS has said you don't need to check yes if you only bought, held or transferred cryptos in or between your crypto wallets and accounts. You also might not need to report gifting crypto to someone else or donating crypto to an eligible nonprofit.
But you may need to check yes and report your associated gains or losses from a crypto transaction if you sold crypto or:
- Used crypto to buy a product or service
- Sold a product or service for crypto
- Exchanged one cryptocurrency for another
- Earned crypto via mining, staking, lending or an airdrop
In short, when you use or exchange crypto, you're essentially selling it in exchange for the product, service, crypto or dollars you receive. That means you need to report the difference between its "sale price" at that point and its adjusted cost basis.
How to Report Crypto Transactions to the IRS
You'll report many of the crypto transactions on IRS Form 8949 and summarize the capital gains and losses on your Schedule D form. But some transactions, such as non-business income from mining or staking crypto, get reported as additional income on your Schedule 1. Figuring out the numbers can be difficult, though.
Some crypto exchanges send a Form 1099-MISC if you earned over $600 in miscellaneous income, such as staking rewards and referral fees. However, the crypto exchanges won't be required to create and send Forms 1099-B, for your gains and losses from trades on the platform, until the 2023 tax year.
If you used a crypto exchange to complete your transactions, you might be able to download a list of your records or create tax reports that you can use to prepare your tax return or upload into your tax preparation software.
Some crypto wallets also let you download a record of transactions, but understanding your cost basis and accurately reporting your gains and losses can quickly get confusing—especially if you have multiple wallets and frequently trade cryptos.
A number of services have sprung up that you can use to track your crypto transactions and create tax reports. Some can connect to your accounts at exchanges and crypto wallets to import transactions. There may be a fee to use the software, and you'll want to make sure that the service supports the exchanges and wallets you used.
Prepare and File an Accurate Tax Return
Crypto exchanges might not report your gains or losses to the IRS, which is why failing to report your crypto sales won't automatically trigger an audit or IRS notice. However, that doesn't give you permission to be careless in your tax filings. The IRS has tools to track crypto transactions, and you still need to report all the required crypto transactions and resulting gains or losses to file an accurate tax return. If you underreport your income, you risk having to pay penalties and interest later.
As an enthusiast deeply immersed in the world of cryptocurrency and taxation, my expertise stems from a comprehensive understanding of the complex intersection between digital assets and regulatory frameworks. I've closely followed the evolution of cryptocurrency taxation and have a profound knowledge of the nuances that individuals face when dealing with crypto transactions and reporting obligations.
Let's delve into the key concepts outlined in the article, "Why You Need to Report Crypto Sales to the IRS":
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Tax Treatment of Cryptocurrency by the IRS:
- The IRS classifies cryptocurrency as property, not currency. Therefore, when you sell crypto, you incur capital gains or losses based on the difference between the sale price and the asset's adjusted cost basis (purchase price plus fees).
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Reporting Crypto Transactions:
- Reporting crypto sales is essential for filing an accurate tax return. Capital gains taxes are influenced by your overall taxable income and the duration the crypto was held before selling. The holding period determines whether gains are subject to short-term or long-term capital gains tax rates.
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Deducting Crypto Losses:
- If you incur losses on your crypto investments, you can deduct them from other capital gains and up to $3,000 of ordinary income annually, helping offset overall tax liability.
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Other Crypto Transactions Requiring Reporting:
- The IRS mandates reporting for various crypto transactions, including selling or exchanging crypto for products or services, using crypto to purchase items, earning crypto through mining or staking, and exchanging one cryptocurrency for another.
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IRS Questionnaire:
- Taxpayers must answer the IRS questionnaire accurately regarding their involvement with virtual currency transactions during the year to avoid legal consequences.
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Reporting Tools and Challenges:
- Reporting crypto transactions involves using IRS Form 8949 and summarizing gains and losses on Schedule D. Some transactions, like non-business income from mining or staking, may be reported on Schedule 1. Challenges arise in calculating accurate figures, especially with transactions from multiple wallets and frequent trading.
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Crypto Exchanges and Reporting:
- Crypto exchanges may issue Form 1099-MISC for miscellaneous income over $600, but reporting gains and losses through Form 1099-B may be deferred until the 2023 tax year.
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Tracking Services:
- Due to the complexity of crypto tax reporting, various services have emerged to help users track transactions and generate tax reports. These services can connect to exchanges and wallets, facilitating the preparation of accurate tax returns.
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Consequences of Underreporting:
- Failing to report crypto transactions accurately may lead to penalties and interest. While crypto exchanges may not automatically report to the IRS, the agency has tools to track transactions, emphasizing the importance of meticulous reporting.
In conclusion, navigating the tax implications of cryptocurrency transactions requires a nuanced understanding of IRS guidelines and meticulous record-keeping. To ensure compliance and avoid potential penalties, individuals should stay informed about reporting requirements and leverage available tools to facilitate accurate tax filing.
