Welcome to the future where money can be completely digital! When Bitcoin was first introduced in 2009, fractions of pennies could buy you tons of Bitcoin. Today, you can use cryptocurrency to buy and sell goods and services, or you can invest it for the future! Today's blog talks about cryptocurrency and how you can properly report it to the IRS so your taxes are in tip-top shape! We cover the basics of cryptocurrency (or as the cool kids call it, crypto), how it can be used in the world, and how to report it on your taxes.
By definition, crypto operates like real money, but it has no real legal tender in any jurisdiction. According to the US government, cryptocurrency is property. There are two main types of crypto: altcoins and tokens.
Altcoins (alternative cryptocurrency)
Basically, anything that’s not a Bitcoin. Since Bitcoin was the first of its kind, other offerings followed soon after realizing the value of cryptocurrency. Today, there are tons of different options for your crypto investment that exist to serve different purposes. Here are 5 of the most popular choices:
Tokens are traded on the Initial Coin Offering (ICO) like stock. Sound familiar? However, they can be represented in different ways, and they represent value more than actual money itself.
Crypto in the Eyes of the IRS
Like we mentioned earlier, cryptocurrency is seen as property by the IRS. This means you need to note things like the fair market value and include crypto transactions in your gross income. Did you know you can be paid with crypto? That’s right! But, your wages are still subject to federal income tax withholding. If you buy and sell goods with crypto, it’s just like any other payment made in property. If you make a payment with a value of $600 or more to a US non-exempt recipient, you must report the payment to the IRS and the payee. This includes payments like rent, wages, premiums, annuities, and other types of compensation.
You may have also heard of the term “mining”. And no, this doesn’t mean taking a digital pickaxe and finding rare crypto to turn into jewelry! This simply means you use computers to validate and maintain a transaction ledger of your crypto activity. If you’re self-employed and doing this, you are subject to self-employment taxes!
Now that you understand the basics of crypto and how it’s used in the real world, let’s talk about how to tell the IRS.
Calculate Your Cost Basis
Because of the volatility of cryptocurrency, it’s important to keep track of how much you’re paying for the investment. Note that this isn’t simply just the price of the purchase, but it also includes transaction fees you may have.
(Price + Fees) / Quantity = Cost Basis
Calculate Your Capital Gains and Losses
Now that you know your cost basis, you can calculate your capital gains or (hopefully not) losses. Similarly to other gains and losses, you’ll need to report these.
Fair Market Value - Cost Basis = Capital Gain/Loss
The two main tax documents you’ll need to worry about are Form 8949 and 1040 Schedule D. There is cryptocurrency tax software that exists, but it may be in your best interest to take this up with a CPA like Practical Accounting Solutions. Our expertise in taxes can ensure you’re on the right track for reporting your crypto!
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