The Internal Revenue Service (IRS) has explicitly stated in their official guidance that all kinds of cryptocurrencies are not to be treated as virtual currency but instead as property for tax purposes. This applies to all cryptocurrencies such as Bitcoin, XRP, Ethereum, Ripple, Litecoin, etc. These crypto coins will be taxed similarly to other forms of property like real estate, stocks, gold and so on.
If you are a crypto trader that has deliberately failed to report your crypto taxes, it will be considered as tax fraud and is a serious offence in the eyes of the IRS. However, do remember that not all cryptocurrency events are taxable.
What Events are Considered as Taxable?
When going about how to file crypto taxes, remember that a taxable event is an action that causes a tax reporting liability i.e. when a taxable event occurs, a capital gain or capital loss will be triggered which will have to be reported on your tax returns.
According to the IRS guidance, a taxable event is when any of the following crypto activities occur.
- When purchasing goods or services using cryptocurrency (calculation of Fair Market Value in USD at the time of the trade).
- When trading cryptocurrency for other cryptocurrency (Bitcoin to Litecoin). Crypto traders will need to calculate the Fair Market Value (FMV) in USD at the time of the trade.
- When trading cryptocurrency for fiat currency (Bitcoin to USD), it is a taxable event.
- When cryptocurrency is received as a source of income (through mining or other forms of earning).
What Events are Considered as Non-Taxable?
When going about how to file crypto taxes, traders must note what qualifies as a non-taxable event. This occurs when the following crypto activities take place, as listed below.
- When cryptocurrency is received as a gift, it cannot be taxed.
- Purchasing and holding cryptocurrency is not a taxable event as no capital gains or losses are realized until you trade or sell your cryptocurrency.
- When a crypto trader transfers cryptocurrency between crypto exchanges or digital crypto wallets without triggering a capital gain or loss.
Why Crypto Exchanges Cannot Provide Accurate Tax Reports?
When it comes down to the right way of how to file crypto taxes, you will notice that the data provided by your crypto exchanges to be inaccurate. If you are a trader that has transferred crypto in and out of exchanges, your original cost basis will be unknown. This is due to the crypto exchange not knowing when, where, how and at what price you originally acquired the cryptocurrency for.
Your exchange can only provide you with information based on what appears in your account. Once the cryptocurrency is transferred to another exchange, the ability to provide accurate details on the Fair Market Value and cost basis is lost. Both these components are necessary for calculating your crypto taxes. There are also free crypto tax calculator in the market to calculate crypto taxes.
When you start the process of how to file crypto taxes, it is advisable to use a crypto tax software. These softwares can import all your crypto data from different exchanges and can precisely calculate your cost basis and FMV. It can reduce any chance of errors and fasten the process of calculating your crypto taxes.
What are the Best Crypto Tax Softwares Today?
If you are a crypto trader going about how to file crypto taxes accurately, CryptoTrader.Tax is a crypto tax software for beginners as well as novice traders. Few of their main features are listed below.
- Filling in IRS Form 8949.
- Generating Audit Trail Reports.
- Direct import with TurboTax.
- Capital Gains Report.
- Cryptocurrency Income Reports.
When going about how to file crypto taxes, using tax softwares like BearTax can immensely ease your crypto complication. BearTax was launched in 2018 and has garnered a large following from small scale cryptocurrency businesses. It currently supports over 40 major crypto exchanges, few of its main features are as follows.
- Support for Unlimited Crypto Transactions.
- CSV files can be directly imported.
- Integration with multiple crypto exchanges.
- Provides crypto traders with High Frequency Trading (HFT) bots.
ZenLedger was started in 2017 and quickly rose to become one of the best crypto tax softwares in the market. Preferred by many crypto traders for its simplistic user interface and exceptional features, ZenLedger supports over 18 major crypto exchanges. Some of their main features are as follows.
- Generating audit reports.
- Granting Certified Public Accountants (CPA) access to crypto data.
- Calculating transactions on airdrops, forks and Initial Coin Offering (ICO).
- Allowing traders to choose accounting methods (FIFO, LIFO, etc.)
- Financial Crimes Enforcement Network (FINCen) alerts.
- Ability to generate tax loss harvesting reports.
- Calculating cryptocurrency received as donations or through mining.
Bitcoin.Tax was launched way back in 2014, the same year the first cryptocurrency guidance was released by the IRS. Many crypto traders have stated that it is one of the best crypto tax softwares when going about how to file crypto taxes. It currently supports over 20 major crypto exchanges, few of the main features of Bitcoin.Tax are listed as follows.
- Option of FIFO and LIFO accounting methods.
- Crypto mining data can be directly imported from crypto addresses.
- Importing CSV files from crypto exchanges like Coinbase.
- Generating reports for IRS Form 8949.
- Calculating and providing reports on Fair Market Value, cost basis and capital gains.
Bitcoin.Tax does not have a free version of its crypto tax software. The pricing starts at $29.95 per year for the basic tier and goes up to $399.95 for its top tier version which comes bundled with many additional features.