It is possible to get your crypto taxes done with minimal pain. The US tax return filing deadline is April 18, which means time is running out to finalize your tax return.
Follow this process to calculate your income from your crypto activity and file your 2021 taxes.
Many of the steps below can be automated with the use of crypto tax software like CryptoTrader.Tax. This is likely your best bet with less than a week remaining.
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Understand the Basics of Cryptocurrency Taxation
You don’t need to become an expert, but you should have a general understanding of how your crypto transactions are taxed.
Generally, crypto activity falls into one of two income categories: capital gains or ordinary income.
You have a taxable event anytime you dispose of your crypto – whether you’re selling them or exchanging them for another cryptocurrency. When digital assets are disposed there is capital gain or loss based on how the value has changed since originally acquired. The formula for calculating gain or loss is proceeds – the value of what you receive – minus the basis of disposed crypto – what you paid for it – to get to your gain or loss.
Let’s go through an example of how to calculate capital gain from transacting with crypto. If you buy bitcoin for $10,000 and the price of that bitcoin appreciates to $12,000 and you exchange it for ethereum, you’ll have proceeds from the sale of $12,000, and cost basis of $10,000 – resulting in a capital gain of $2,000.
Any fees from trades can be used to increase cost basis upon acquisition or reduce proceeds upon disposal. This in turn reduces your taxable income from these trades.
If you earn cryptocurrency, you’ll have ordinary income equal to the fair market value of the crypto at the time it was received. There are many different ways to earn crypto including from mining, airdrops, staking, or interest. Even referral rewards count as income.
Take Account of all Exchanges and Wallets
Make a note of all exchanges, wallets, and blockchains you have ever previously used. You’ll want to be able to access these accounts in order to see your transaction history in order to calculate your capital gain or loss.
Activity may be spread across different exchanges, wallets, and different blockchains, so it’s essential to keep a record of what platforms were used.
Calculate your Gain/Loss and any Income from Earnings
Once you have all your transactions, you can go through and start identifying every taxable transaction. You’ll have to calculate your net gain or loss on your crypto transactions as well as any earned income from crypto.
Part of calculating your gain or loss on each disposal is figuring the basis of the asset that was disposed. Not only is it difficult to track cost basis across multiple different exchanges and wallets, but for each disposal a decision has to be made as to which tokens are sold.
Imagine purchasing 1 bitcoin at three different times – when the price is $20,000, $30,000 and $40,000. Then you decide to sell 1 of your 3 bitcoins for $50,000. To determine your gain, you need to determine which bitcoin you sold. Depending on which bitcoin you sold you have anywhere from $10,000 to $30,000 of gain.
Although you are able to specifically identify which tokens are being sold, common methods for tracking cost basis include first-in-first-out (FIFO) or last-in-first-out (LIFO). With FIFO, the first coin you purchase (chronologically) is the first coin that is considered sold. With LIFO, the most recent coin purchased is the first coin that is considered sold.
It is also necessary to report all taxable transactions in US dollar terms. Any transactions that were priced in crypto will need to be converted to US dollars. You’ll need to develop a reasonable method for the conversion and apply the same method across all of your transactions.
Next is to add up all of your earned crypto throughout the 2021 tax year. You’ll need to add up all crypto income from mining, airdrops, staking and interest.
Earning crypto can happen from one-off events but oftentimes with interest and staking income events happen consistently, like every day, over a period of time. You’ll have to add up each income event, priced at the time it was received. This can be time-consuming if earning events happen multiple times a day over several months.
File your Taxes
The final piece is to report your taxable activity on your tax return.
Each one of your capital gain transactions need to be reported on your tax return. Gather the date acquired, date sold, proceeds, and basis for each disposal to report on Form 8949.
After each transaction is entered you can total your proceeds, basis, and gain for all of your crypto activity on the Form 8949. These totals then get reported on Schedule D.
Total your earned crypto income and report this on Schedule 1 on the “Other income” line item.
Once all of your taxable transactions are reported on your tax return, you can file and be done – at least for the 2021 filing season.