September 26, 2019

How to Report Taxes on Cryptocurrency

Justin Woodward, Tax Attorney

Justin Woodward
Crypto Tax Attorney

In 2014 the IRS clarified that cryptocurrency is taxed as property. This means that every cryptocurrency trade or sale is a taxable event. Although taxpayers are required to report taxes on virtual cryptocurrencies such as Bitcoin, the process of doing so before TaxBit was I guess you could say... taxing.

Over the last couple of months the IRS has sent thousands of letters to taxpayers who traded in virtual currencies requiring them to report their capital gains/losses on an IRS 8949 tax form. TaxBit is the only cryptocurrency tax software that was founded by cryptocurrency tax attorneys and blockchain CPA’s to accurately automate this process. Cryptocurrency traders learned firsthand through these audits that proactive reporting with the IRS on virtual currency transactions is far better than reactive.

The three most critical things to be tax compliant are to: 1) properly report your transactions on an IRS 8949 cryptocurrency tax form; 2) report your mining activity as ordinary income; and 3) be able to back-up your forms with an expert backed immutable audit trail.

1. Cryptocurrency Capital Gain/Loss Tax Forms

TaxBit’s cryptocurrency tax software allows taxpayers to connect their exchanges and wallets through “Read Only” API’s. TaxBit automatically pulls in all your transactions, runs them through its CPA audited cryptocurrency tax software, and produces the required IRS 8949 cryptocurrency tax forms. The complete IRS 8949 cryptocurrency tax forms can be uploaded into a popular tax filing software such as TurboTax, TaxAct, TaxSlayer, H&R Block, or can be handed to your CPA to plug into your return.

The cost basis for every virtual currency transaction is tracked, as well as the corresponding capital gain or loss. If a taxpayer holds a cryptocurrency for longer than a year then gains will be taxed under the tax preferred federal long-term capital rates. If a taxpayer sells their cryptocurrency prior to holding for a year then gains will be taxed as ordinary income. TaxBit automatically detects your holding period and ensures you receive tax preferred long-term federal rates if you held the asset for longer than a year.

Your capital losses can be used to offset capital gains. If, for example, you incurred $5,000 in short-term losses on your Bitcoin trades and had $7,000 in long-term gains on your Bitcoin, then your gains and losses can be used to offset each other. In this example you would have only realized long-term net taxable gains of $2,000 after the offset. TaxBit helps taxpayers track their holding period so that they can delay gains until they are long-term tax advantaged, and also so that they can claim any losses that have not been realized.

If you had net taxable losses for the year then you can claim the capital loss deduction, which allows you to deduct up to $3,000 a year. Any excess losses above that amount can be carried forward to offset gains in future tax years. TaxBit tracks your net capital losses to ensure you receive the capital loss deduction and also makes sure that excess losses are carried forward so that you pay less in taxes.

2. Mining Taxes

If taxpayers mined cryptocurrency such as Bitcoin then the mined coins will be treated as ordinary income. The IRS instructs that your taxable income is the value the virtual currency was worth at the time you received it. Likewise, you will also have a cost basis in the asset in the same amount as was reported as income. If you subsequently trade or sell the mined coins then this event must also be reported on your IRS 8949 cryptocurrency tax forms because you have a cost basis in the capital asset, as well as a corresponding gain or loss.

You may be eligible to take advantage of several deductions if you operated a mining business. This may include deductions for the cost of equipment, electricity, real estate, and maintenance cost. TaxBit produces the necessary forms to report both your mining and capital gain/loss tax reports.

3. Audit Trail

Leading CPA firms are amazed at the transaction level detail that TaxBit includes in its CPA designed audit trail. Taxpayers, CPA’s, and auditors can drill-down and see exactly how the taxes on their cryptocurrency transactions were calculated. The audit trail allows you to filter by coin, such as Bitcoin, to see your full transaction history for each asset. You can also easily filter by transaction type to see which coins you bought, sold, or traded. As well as filtering by exchange or taxable year.

TaxBit’s CPA designed cryptocurrency audit trail provides a full history for each historical tax year. This ensures accurate cryptocurrency reporting and allows you to sleep easy at night knowing you’re prepared in the event of an audit.

TaxBit Is Here to Help!

Although cryptocurrency taxes can be complex, TaxBit automates this process making it simple.

-Written by Cryptocurrency Tax Attorney Justin Woodward


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