Cryptocurrency has gained lots of attention and recognition over the past decade. Along with its steady rise in popularity, a few governments have adopted the use of cryptocurrency in their markets. Along with the government’s involvement, the concept of bitcoin tax-reporting has come to light. Governments and centralized banking systems constantly monitor the movement of cash and aim to have transparency. However, due to the nature of cryptocurrency, this makes it hard for them to keep an eye on the market.
Bitcoin tax reporting procedures are still relatively new, with no standardized taxation rules, but there are other regulations that traders follow like FIFO and LIFO, as well as IRS tax regulations. Most free tax software programs, as well as paid options, are set up to handle cryptocurrency transactions. However, it still might be beneficial to speak to a professional since the legislation surrounding cryptocurrency taxation is constantly evolving.
Basics of Bitcoin Tax
As per the IRS’s(Internal Revenue Service) regulations, cryptocurrency is to be treated as property, making them applicable for taxation. Just like the stock market, you will need to generate bitcoin tax reporting documents on the capital gains and losses that you have incurred in your crypto trading account.
Due to the untraceable concept of cryptocurrency, traders have not been filing for crypto taxes. However, there are many traders who proactively file for their crypto taxes in order to avoid getting flagged by the IRS. This could lead to a hefty fine, or possibly even incarceration.
IRS Regulations on Bitcoin Tax
The Internal Revenue Service(IRS) has issued guidelines for bitcoin tax reporting. The new taxation scheme shines a light on some of the queries that cryptocurrency traders have been confused with in the past.
Guidelines Put-Into-Effect by the IRS
Before the new guidelines were put into effect, crypto traders were not sure how to determine the cost basis for their cryptocurrency assets.
IRS has mentioned that the taxpayers can select which units or lots of cryptocurrencies they are planning to sell within a given timeframe, as long as they can accurately identify and support the cost basis of those units.
When precisely determining the cost basis of a unit in cryptocurrency, you must mention the following information.
- Date and time of the procurement of every unit.
- Date and time of every unit that has been sold, exchanged, or disposed of.
- Fair market value of each unit upon procurement.
- Fair market value of each unit upon sale, exchange, or disposal and the value of currency received for each unit.
Forks: Events in a Blockchain that require Bitcoin Tax Reporting
A hard fork is an enormous change to the protocol of a network that makes previously invalid blocks and transactions in a blockchain valid, or vice-versa. A hard fork is essential like a massive version update of the blockchain which requires all the cryptocurrency nodes and users to upgrade to the latest version protocol software.
If the cryptocurrency that you possess goes through a hard fork. The new cryptocurrency you receive after the fork is taxed as income, and if you haven’t received any new income, then you will not be applicable for income tax.
A soft fork affects the blockchain by changing the software protocol in a manner where the blocks or transactions before the soft fork has occurred has been made invalid. Since the old cryptocurrency nodes will recognize the new blocks as valid, a soft fork is considered as backward-compatible.
According to the IRS, soft forks do not result in any taxable events. This is because a crypto trader who has undergone a soft fork will not receive new coins. Coins received represent income, and since there is no income, there is no crypto tax to be applied for.
Calculating Capital Gains and Losses
Calculating your capital gains and losses for your cryptocurrency transactions is fairly straightforward. However, you do need to be sound on your understanding of taxable and non-taxable events.
Taxable Events in Cryptocurrency
A taxable event in an action that triggers a tax liability. When one of these events occurs, it results in a capital gain or a capital loss that needs to be reported as part of your crypto tax return statement.
Instances of Taxable Events
- Trading cryptocurrency for conventional fiat currency such as the US dollar is a taxable event.
- Trading cryptocurrency for another form of cryptocurrency is a taxable event. The fair market value in US dollars must be noted at the time the trade took place.
- Earning income through cryptocurrency trade and mining is a taxable event.
- Payments of goods and service with cryptocurrency is a taxable event.
Instances of Non-Taxable Events
- Buying cryptocurrency with US dollars is not a taxable event.
- Gifting cryptocurrency is not a taxable event.
- Transfering different forms of cryptocurrencies between different exchange wallets is not a taxable event.
A point to keep in mind is that you are not subjected to capital gains or losses unless you use, trade, or sell your cryptocurrency.
Bitcoin Tax Reporting and Filing
In order to file and report your bitcoin tax and transactions, you need IRS Form 8949 and 1040 Schedule D Form.
Ensure that you declare your cryptocurrency trades and sales in form 8949 with the date on which you acquired the cryptocurrency, the date on which you sold or traded your cryptocurrency, your Fair Market Values, your cost basis, and ultimately, your gains and losses.
Once they have been listed, calculate the total amount and transfer it to the 1040 Schedule D. You will need to fill out both IRS Form 8949 and 1040 Schedule D Form in order to apply for your annual crypto tax returns.
Crypto Tax Calculator
Calculating crypto taxes manually is an extremely tedious process.
A crypto tax calculator or a crypto tax estimator is a tool that crypto traders use to aid in the calculation of your cryptocurrency tax. How it works is it retrieves data from your cryptocurrency trading account or accounts and then it automatically processes the data and estimates your capital gains and losses along with bitcoin tax reporting document creation for tax filing purposes.
ZenLedger is one of the newer crypto tax calculators to enter the market, but it is every bit as good as the other premium subscription-based tax calculators, offering an array of functions to help you with your bitcoin tax reporting and tax filing.
ZenLedger is also known for its excellent customer service, so you will have no hiccups while navigating through their software.
If you need to get your bitcoin tax reporting documents in order for this year, give ZenLedger a try.