Cryptocurrencies like Bitcoin and Ethereum have exploded in popularity in recent years. As more people invest in crypto, questions arise about how to handle it at tax time. Failing to report crypto activity on your taxes can lead to serious consequences, so it’s important to understand your responsibilities.
Do I need to report crypto on my taxes?
Yes, you need to report all crypto activity on your tax return if you meet certain thresholds. The IRS treats cryptocurrencies like property, not currency. That means they are subject to capital gains taxes. Here are the key reporting requirements:
- You must report any cryptocurrency transactions if you realized a capital gain of over $600 from all sources combined.
- You must report cryptocurrency received from mining, staking, and other activities as income if it exceeds $600.
- You must report any crypto gifts you received if over $15,000.
These rules apply even if you didn’t sell the crypto but just traded or exchanged it for another cryptocurrency.
What crypto activity do I need to report?
You need to report any crypto transactions where you experienced a taxable event. This includes:
- Selling cryptocurrency for fiat currency like dollars
- Trading one crypto for another (e.g. Bitcoin for Ethereum)
- Using crypto to buy goods or services
- Receiving crypto as income (e.g. mining rewards)
- Converting crypto to stablecoins like USDC
You’ll need to calculate your capital gains or losses for each taxable event and report that. If you received crypto as income through mining or staking, you’ll need to report the fair market value of the crypto at the time you received it.
How is crypto taxed?
Cryptocurrency is taxed differently depending on how long you held it:
- Short-term capital gains – You held the crypto for 1 year or less. Taxed at your ordinary income tax rate.
- Long-term capital gains – You held the crypto for over 1 year. Taxed at preferential long-term capital gains tax rates of 0%, 15% or 20%, depending on income.
You’ll need to calculate your gains and losses for each taxable crypto transaction. Losses can be used to offset capital gains.
What are the penalties for not reporting crypto activity?
The penalties for not reporting cryptocurrency transactions can be severe. Here are some potential consequences:
- Additional tax owed – You’ll need to pay capital gains taxes plus interest and penalties on any crypto gains you failed to report.
- Audit risk – Not reporting crypto is likely to increase your odds of being audited by the IRS.
- Penalties – You may owe a penalty of 20% to 25% of the additional tax due if the IRS discovers unreported crypto income.
- Criminal prosecution – Willful tax evasion can result in fines up to $100,000 and imprisonment up to 5 years.
In 2019, the IRS sent thousands of warning letters to crypto holders who may have failed to report income and transactions. Don’t take the risk of ignoring your crypto tax reporting responsibilities.
How can I properly report crypto on my taxes?
Follow these best practices to accurately report crypto activity on your tax return:
- Maintain thorough crypto transaction records with details like date, value, and purpose of each transaction.
- Calculate your realized capital gains and losses for every taxable event.
- Review Form 8949 and Schedule D instructions for how to summarize your gains and losses.
- Fill out Form 8949 to provide details on each transaction.
- Transfer totals to Schedule D and then to your 1040.
- Consider working with a crypto-savvy tax professional if you have extensive activity.
Reputable crypto exchanges like Coinbase issue Form 1099-Ks and 1099-B tax forms detailing your transactions. However, you can’t rely only on these – you need to independently verify your transactions.
Can I amend a past return to report crypto?
Yes, if you failed to report crypto activity in a previous tax year, you should file an amended return. Use Form 1040X to file an amended return. This allows you to correct your original return. You’ll need to calculate capital gains and losses and pay any additional tax you owe, plus interest and penalties. The sooner you do this, the better.
The statute of limitations means the IRS can audit your return for up to 3 years from the filing date. If you don’t amend returns with unreported crypto before the statute expires, you may avoid some penalties. However, if the IRS finds you under-reported income, you’ll still owe taxes plus hefty interest and penalties.
Are there any exceptions where I don’t need to report crypto?
There are a few scenarios where you may not need to report crypto transactions:
- Gifts under $15,000 – You don’t need to report receiving crypto gifts under $15,000.
- Transactions under $600 – If all your transactions resulted in less than $600 total capital gain/loss.
- Non-taxable crypto wallet transfers – Transferring crypto between your own wallets is not taxable.
- Purchases with crypto – Using crypto to buy goods or services is not a taxable event.
However, many crypto investors will exceed these thresholds and need to report. Consult a tax pro if you’re unsure.
Should I report crypto on FBAR or FATCA forms?
You may need to report crypto holdings on FBAR (Report of Foreign Bank and Financial Accounts) and FATCA (Foreign Account Tax Compliance Act) forms if applicable. These require reporting foreign financial assets valued over certain thresholds.
Cryptocurrency held on foreign exchanges or in foreign wallets needs to be reported on:
- FBAR – If over $10,000 at any time during the year
- FATCA Form 8938 – If over $50,000 on last day of tax year or over $75,000 any time during tax year
There are serious fines for non-compliance. Work with a tax professional familiar with crypto to ensure you meet FBAR and FATCA reporting requirements.
Can I reduce my crypto tax liability?
Here are some tips to potentially lower your crypto tax burden:
- Hold crypto for over a year before selling to qualify for preferential long-term capital gains tax rates.
- Use crypto tax software to identify tax-saving trade strategies like tax-loss harvesting.
- Donate crypto to charity to claim a tax deduction without needing to sell.
- Offset gains with capital losses from stock and crypto trades.
- Deduct related expenses like mining equipment and exchange fees.
- Contribute to a tax-advantaged retirement account like an IRA with crypto holdings.
Consult a crypto-savvy tax professional to identify the best strategies to minimize your tax liability.
Conclusion
Failing to report cryptocurrency transactions can lead to significant penalties, interest, and back taxes. With the IRS cracking down, taxpayers should report crypto holdings and activity accurately and completely. Maintain thorough records, calculate taxable gains and losses, and file all required forms. Consider amending past returns if you need to report additional crypto income. With sound reporting practices, you can avoid trouble and make sure you pay only what you legally owe in crypto taxes.