[updated 3\/22\/2022]<\/p>\n
We are seeing a lot more of our clients with virtual currency transactions recently, so we\u2019ve put together this FAQ to assist with tax reporting of these transactions.<\/p>\n
All I did was buy cryptos, do I need to report anything?<\/em><\/strong><\/p>\n Yes. Your tax return includes reporting that you own any virtual currency (there\u2019s a Yes\/No box to check on the front page of the tax return).<\/p>\n Purchasing a virtual currency is not a taxable transaction, but if you purchased one currency and then transferred it to a different currency, the IRS treats this as selling the first to purchase the second.\u00a0 And any sale is a taxable event.<\/p>\n <\/p>\n What transactions do I need to report?<\/em><\/strong><\/p>\n <\/p>\n What transactions are not reported?<\/em><\/strong><\/p>\n <\/p>\n How do I report my virtual currency transactions?<\/em><\/strong><\/p>\n Virtual currency can be reported as self-employment income, ordinary income, or investment income (capital gains\/loss).<\/p>\n Virtual currency received as a result of mining or in exchange for services provided is treated as self-employment income (generally reported on a Schedule C).\u00a0 It is reported at the market value on the date it is received.\u00a0 This also become your acquisition cost for future capital gains reporting.<\/p>\n Virtual currency received through a hard fork or airdrop is treated as ordinary income (generally reported as \u201cother income\u201d on the Form 1040).\u00a0 It is reported at the market value on the date it is received.\u00a0 This also become your acquisition cost for future capital gains reporting.<\/p>\n Most other virtual currency transactions are considered sale of property and reported on Schedule D, taxed as capital gains income.\u00a0 These transactions are reported like buying & selling stocks or other financial assets and any increase is value is taxed as a capital gain and losses are deductible (with limits).<\/p>\n <\/p>\n If you are preparing my tax return, what information do you need from me to report my virtual currency transactions?<\/em><\/strong><\/p>\n To report your virtual currency transactions, we need a listing of each transaction showing the following:<\/p>\n <\/p>\n For example, imagine the following set of (fictitious) facts:<\/p>\n 1\/1\/18 purchased $1,000 worth of Bitcoin (valued $13,500 per coin = 0.074 Bitcoin received<\/em>)<\/p>\n 6\/1\/18 traded half of that bitcoin for Ethereum\u00a0 (Bitcoin valued at $7,500 so 0.074 Bitcoin valued at $555, half of which is traded ($277).\u00a0 Ethereum valued at $577 per coin = 0.480 Ethereum<\/em>)<\/p>\n 10\/30\/18 sold the other half of the Bitcoin for $229 (valued $6,200 per coin and 0.037 Bitcoin sold<\/em>)<\/p>\n 10\/30\/19 sold the Ethereum for $92 (valued $192 per coin and 0.480 Ethereum sold<\/em>)<\/p>\n <\/p>\n Most virtual currency wallets will provide a list of transactions with the transaction market value, but they do not report your purchase date or acquisition cost.\u00a0 The transactions in the example above would show in a virtual currency transaction list as follows:<\/p>\n 1\/1\/8 buy 0.074 Bitcoin $1,000<\/p>\n 6\/1\/18 trade 0.037 Bitcoin for 0.480 Ethereum<\/p>\n 10\/30\/18 sell .0.037 Bitcoin $229<\/p>\n 10\/30\/19 sell 0.480 Ethereum $92<\/p>\n <\/p>\n These same transactions would show on a tax return Schedule D as follows:<\/p>\n 6\/1\/18 sale date Bitcoin \u2013 sales price $277, purchase date 1\/1\/18 \u2013 cost $500 \u2013 capital loss $223<\/p>\n 10\/30\/18 sale date Bitcoin \u2013 sales price $229, purchase date 1\/1\/18 \u2013 cost $500 \u2013 capital loss $271<\/p>\n 10\/30\/19 sale date Ethereum \u2013 sales price $92, purchase date 6\/1\/18 \u2013 cost $277 \u2013 capital loss $185<\/p>\n <\/p>\n As you can see, the wallet transaction list is incomplete for tax reporting.\u00a0 Also note that this is a very simple example \u2013 imagine 25 different purchases of Bitcoin, 12 exchanges between different 4 different virtual currencies, and 8 currency sales.\u00a0 The tracking for tax purposes gets complex quickly!<\/p>\n <\/p>\n How can I make tax reporting easier?<\/em><\/strong><\/p>\n To bridge the gap between the wallet transaction list and the full tax reporting details needed, you need to use a third-party service that will connect to your wallet(s)\/exchange(s) data to create tax reports.<\/p>\n A few examples of these are cointracking.info<\/a>, cointracker.io<\/a>, bitcoin.tax<\/a>, essentials.lukka.tech<\/a>, and zenledger.io<\/a>.\u00a0 If you are a heavy trader with more than 15,000 transactions, we recommend cointracking.info<\/a>.<\/p>\n For any of these systems to provide you with accurate tax reports, it is critical to include all<\/u> transaction history from all<\/u> wallets and exchanges.<\/p>\n\n
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