How to Report Crypto on Your Taxes in the U.S.

If you've ever scratched your head trying to figure out your crypto taxes, you're not alone. With the IRS cracking down on crypto in more recent years, understanding your taxes will save you from audits and penalties.

Before we fully dive in, you need to understand some basics of crypto taxes.

Crypto earnings can be categorized into two distinct types: capital gains and ordinary income.

Investing activities, which include actions like buying, selling, and exchanging crypto, typically result in capital gains income. For instance, let's say you purchased Litecoin for $8,000 and later traded it for Bitcoin when its value had risen to $10,000. In this scenario, you would have realized a $2,000 capital gain. This gain, derived from your investment activity, is classified as capital gains income and should be reported as such on your tax return.

If you're on the earning side of crypto—be it through employment, mining, staking, or receiving interest rewards—this typically falls into the ordinary income category. Imagine you earned 1 Bitcoin throughout the year as a reward for participating in a mining pool. In this case, you would need to report the equivalent U.S. dollar value of the 1 Bitcoin as ordinary income.

First step when reporting is collecting all of your transaction data.

You can gather all your historical transaction data manually by downloading gain and loss CSV files from all of the exchanges you’ve used. You can compile them yourself or use a crypto tax software that will make everything nice and neat for you. Just remember, while crypto tax software is easy to use, it still isn’t perfect.

Once all your transactions are in one place, it's time to calculate your gains, losses, and income from each taxable event. A taxable event is any scenario that triggers a tax reporting requirement, such as selling crypto for fiat currency, trading one crypto for another, using crypto to purchase goods or services, or earning crypto.

Calculating your capital gains or losses is a straightforward process. The initial amount you spend to purchase an asset is known as the "cost basis," while the amount you sell it for is termed the "proceeds." The disparity between your cost basis and the proceeds represents either a gain or a loss. For instance, if you buy Ethereum for $5,000 and later sell it for $3,000, you've incurred a loss of $2,000.

Capital gains are categorized into two distinct brackets for tax purposes. The first category encompasses short-term gains, which are taxed at the same rates as your regular income. This applies to assets you've held for less than a year. For example, if you purchase cryptocurrency in January and sell it in March, that's considered a short-term gain.

The second category is long-term gains, which are applicable to assets held for more than a year. Long-term gains are beneficial because they are taxed at lower rates. So, if you acquired Bitcoin in January 2021 and sold it in February 2022, you would be dealing with a long-term gain.

Finally, it's time to report your crypto transactions on the appropriate tax forms. Capital gains and losses from cryptocurrency trades are reported on IRS Form 8949. Sum up all of your trades to calculate your net gain or loss for the year.

For ordinary income, such as earnings from mining or staking, you'll report this on various tax forms depending on the nature of the income. This could be Schedule C for self-employment income or Schedule 1 for other types of income.

After completing your tax forms, they're ready to be filed with your tax return.

Side Note:

While the basics of crypto taxation may seem straightforward, there are intricacies to consider. Factors like hard forks, airdrops, gifts, inheritances, and lost or stolen coins can complicate tax calculations. Additionally, tax implications can change based on jurisdictional regulations.