Here is a Guide to Reporting Your Crypto Gains.
The IRS will officially open the 2020 tax filing season on January 27, 2020. To make tax compliance easier, taxpayers can file their federal taxes for free if they earned below $69,000 in 2019. The various free filing options are available on this link. More than 20 states also offer a free filing option. Taxpayers who earned income from cryptocurrencies in 2019 should disclose it on a revised Schedule 1 (dealing with additional income and adjustments to income) of their Form 1040 or Form 1040-SR. The first question on that schedule reads: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
How you report income from crypto transactions depends on how they were acquired and the length of time held before an exchange for value.
You may have acquired virtual currency through any of the following means:
As an investment
If you acquired cryptocurrency solely to sell for profit, your gain could be a long or short term capital gain. It would be a long term capital gain if you held it for more than a year. It is short term if held for less than a year. The following article by Tina Orem on NerdWallet analyzes how you calculate your capital gains tax based on your tax bracket and strategies for minimizing it.
For each crypto transaction where you realize value, provide the following information on Form 8949.
Description of the asset: State if it is Bitcoin, Ethereum, Ripple, etc.
Date acquired: Include the date you purchased the cryptocurrency. You may be confused about this, especially if you sold a fraction of your cryptocurrency acquired on different dates (with varying costs of acquisition). This an issue about accounting for cryptocurrency gains. The general rule is that taxpayers should specifically identify each unit of cryptocurrency sold (Specific Identification Method “SIM”). If you cannot use SIM, consider any unit sold as the first acquired (First-In-First-Out Method “FIFO”). Below is an example of both methods, which an earlier article further explains.
Date sold: Include the date you sold it.
Gain or loss: Once you know the cost of the cryptocurrency and value at the time of sale, provide the gain or loss for each sale. Ensure you make adjustments like fees incurred on the sale.
After providing the above information, report your calculated short/long term capital gain or loss on Schedule D of your Form 1040.
Note that realization events go beyond exchanging cryptocurrency for fiat. If you trade one cryptocurrency for another or use it to purchase an item or service, that is a realization event. In that case, please take note of the value of the item you exchanged for it. That value is your sales price.
As a business receiving cryptocurrency as payment for goods and services
Note the fair market value (“FMV”) of the cryptocurrency on the date received. After that, calculate the total amount of all payments received in cryptocurrency.
Sole proprietorships or single members of Limited Liability Companies should report the FMV of all sales in cryptocurrency on Line 1a of Schedule C. For details on how you fill schedule C, read this article. Multi-member LLCs and partnerships should report all sales on Line 1a Form 1065, and each partner’s distributive share of partnership income (derived after subtracting business expenses) on Part III (Line 1) of Schedule K-1. Corporations should report all sales on Line 1a of Form 1120.
As an individual engaged in mining cryptocurrency
Note the FMV of each cryptocurrency you receive as a reward for successful mining. After that subtract your expenses like the cost of electricity, rent, computer equipment and so on. The form you use in reporting your income depends on business structure (sole proprietorship, partnership, corporation). See (2) above. You are also subject to self-employment taxes (that is, social security and medicare taxes for individuals who work for themselves) if your net earnings are $400 and above. Compute self-employment taxes on Schedule SE.
As an individual as payment for providing services
Note the FMV of the cryptocurrency on the date received. If received as an independent contractor, you are subject to self-employment taxes. The person making the payment should file and also issue you Form 1099-MISC if it exceeds $600 in value. If you receive cryptocurrency as an employee, your employer should have withheld social security and medicare taxes in addition to federal and state income taxes. The amount withheld is in your Form W2, which you use to prepare your tax return.
In an airdrop after a hard-fork
Include in gross income the FMV of the new units received once you can exercise control (freely exchange for value) over them. In your Form 8949, your cost basis for the new units received should be $0.
Currently, US exchanges are required to report transactions on users with a trading value exceeding $20,000 in a tax year. Coinbase issues Form 1099-K to these taxpayers and the IRS. For taxpayers who are in doubt on whether exchanges will report their transactions, you can find this information on the Coinbase website, the Gemini website. Thus traders exceeding the $20,000 limit should ensure they appropriately report their crypto income. Kraken has left the responsibility of reporting on taxpayers. In July 2019, the IRS issued more than 10,000 letters to taxpayers who failed to report crypto income or failed to report crypto transactions correctly.
In the end, full compliance is the safest bet.
Disclaimer: This article is for informational purposes only. Consult your tax or legal adviser before relying on same.
Published at Sun, 19 Jan 2020 19:58:26 +0000
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