Each year, millions of Americans complete and file their tax returns. These tax forms determine the percentage of tax money each U.S. citizen must pay the government.
If you’ve ever made money from cryptocurrencies such as Bitcoin, you must report this. It’s the same when you invest in other investments such as stocks, bonds, and real estate.
If you omit this information from your tax return, you could be subject to severe penalties such as high fees or prison time. So how exactly do you report cryptocurrency on taxes?
Keep reading to learn how to report on taxes accurately.
How To Report Cryptocurrency on Taxes?
Learning how to report cryptocurrency on taxes can be daunting. However, with a step-by-step guide, it can be broken down into manageable steps;
Determine Your Cryptocurrency Transactions
This includes any purchases, sales, exchanges, or disposals of cryptocurrency that you made during the tax year. It is essential to keep records of all your transactions, including the date, type of cryptocurrency, and value in US dollars at the time of the transaction. You will need this information to accurately report your capital gains tax on cryptocurrency or losses.
Determine Your Cryptocurrency Holdings
As of December 31 of the tax year, you will need to determine the value of your cryptocurrency holdings in US dollars. This includes any cryptocurrency you own and have yet to sell or exchange. You will need this information to determine your gains or losses for the tax year.
Determine Your Gains or Losses
It would be best to determine whether you had a gain or a loss for each transaction. To do this, subtract the value of the cryptocurrency when you acquired it from the value when you disposed of it.
If the result is a positive number, you had a gain. If the result is a negative number, you had a loss. You will need to calculate your gain or loss for each transaction separately.
Report Your Gains or Losses on Your Tax Return
If you have any gains or losses from cryptocurrency transactions, you will need to report them on your tax return. If you had a net gain, you might need to pay tax.
You could claim a loss on your tax return if you had a net loss. You will need to report your gains or losses on Form 8949, Sales and Other Dispositions of Capital Assets, and include it with your tax return.
Keep Records
It is essential to keep records of all your cryptocurrency transactions and holdings, as you may need to refer to them in the future. The IRS may request documentation to verify the information you report on your tax return.
Keeping records of all your cryptocurrency transactions and holdings for at least three years is a good idea. This includes keeping track of any documents related to your cryptocurrency transactions. If you want more info on crypto taxation, click here.
Pay Your Taxes!
Reporting cryptocurrency on taxes can be challenging, but following the step-by-step guide provided will make the process easier. Understanding the rules, properly recording transactions, and following the IRS’s guidelines will reduce the risk of an audit and help give peace of mind.
Everyone should ensure to prepare and adhere to the proper rules of reporting cryptocurrency on taxes. Contact a licensed tax specialist if you need more detailed advice and guidance.
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