Crypto Tax Tips from TaxBit

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For United States-based traders, tax season is getting close to the end. This year, we’re proud to announce that we’ve partnered with crypto-focused tax reporting service TaxBit to help make the tax reporting process more seamless. 

Through our partnership with TaxBit, you can sign-up and save 10% via this link and easily convert the 1099-B to an IRS 8949 that is ready to file with your taxes in just a few clicks. You can easily upload your Edge CSV to seamlessly pull your transactions through Taxbit’s tax engine and auto-generate your tax forms. Aside from automating your taxes, TaxBit provides real-time portfolio tracking and tax optimization visibility so that you can make tax-optimized crypto trades throughout the year. 

All tax reporting can be daunting, and reporting your cryptocurrency taxes can be especially complicated. TaxBit and Edge have teamed up to answer taxpayers’ most frequently asked questions when reporting taxes on their cryptocurrency transactions.  

Should I file taxes on my crypto? 

The short answer is yes. The IRS now asks all taxpayers if they are engaged in virtual currency trading activity on the front page of their tax return. Edge and TaxBit are leading the charge in making it easy for Edge users to report their cryptocurrency activity.

How is cryptocurrency taxed?

In the U.S., cryptocurrency is taxed as a capital asset, like property. Every taxable event — as defined by the IRS — must be reported on an IRS 8949 cryptocurrency tax form. With TaxBit, you don’t have to worry about figuring out which of your crypto trades are considered taxable events. TaxBit’s software is integrated with Edge and automatically determines what trading activity among customers is subject to taxation.

However, it’s important to note that, when sending a transaction out of Edge to an external wallet, even if the same user controls the external wallet (meaning this is not a sale of crypto, as defined by the IRS), these transactions are tagged by default as an “Expense” in Edge’s metadata. In an effort to make sure all transactions which should be considered taxable events are in fact counted as a taxable event, Taxbit’s software will default to treating these sends to an external wallet as a taxable event. If an Edge user knows that a transaction which is tagged as an “Expense” was in fact not a sale of crypto, but was instead a “Transfer” of crypto from their Edge wallet to an external wallet that they control, the tag for this transaction can be adjusted within Taxbit’s interface to ensure that this transaction is not counted as a taxable event. See the screen recording below on how this is accomplished:

What changed for the 2020 tax season?

Starting in 2020, the IRS added a question to its personal federal income tax form (1040) that asks taxpayers, “at any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

If a taxpayer answers “Yes” to this newly included question on their income tax filing, then the IRS will look to see if the taxpayer filed an 8949 form to report capital gain/loss for virtual currency transactions. 

If the taxpayer fails to report their cryptocurrency taxes, the IRS can now prove intentional disregard for knowingly failing to report cryptocurrency taxes. Fortunately, similar to the sale of stock, 26 U.S. Code § 1211 of the Internal Revenue Code provides relief in the form of a deduction for losses on capital assets. 

How to report capital gains on crypto 

According to U.S. tax law, there are two types of capital gains that can be calculated when you sell a given asset — short-term and long-term capital gains. 

Short-term capital gains

If you hold a particular cryptocurrency for one year or less, then your transaction — in the case that you sell crypto for fiat or trade crypto for crypto — will be eligible to be taxed for short-term capital gains. Short-term capital gains are added to your income and taxed at your ordinary income tax rate.

Long-term capital gains

If you held a particular cryptocurrency for more than one year then you are eligible for tax preferred long-term capital gains. The long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status. They are generally lower than short-term capital gains tax rates.

How to report losses on crypto trades

With wild price swings and volatile coins, most crypto traders lived through the unfortunate reality of losing money on their trades at least once in a taxable year. Fortunately, the IRS allows taxpayers to claim deductions on their cryptocurrency capital losses. 

TaxBit provides the required IRS 8949 cryptocurrency tax form, which will be transposed onto a taxpayer’s Schedule D tax form. Schedule D (Form 1040) is used to report your capital gains and losses in the sale or exchange of capital assets that are not held for business or profit. 

Please note, ordinary income is not reported on a Schedule D form. Crypto mining income is considered ordinary income, and should be reported via W-2 form.

Why crypto traders should report losses

Speaking to the overall importance of reporting both gains and losses on crypto trades, Kevin F. Sweeney, a former U.S. federal tax prosecutor, stated last year that “failing to report your losses and gains could have big consequences.”

Reporting your losses on crypto transactions has the added benefit of potential tax deductions. Taxpayers can deduct $3,000 in capital losses a year ($1,500 if you are married and filing a separate tax return). Claiming your cryptocurrency capital losses can result in a higher refund on your tax return via this deduction.

Also important to note, if a taxpayer has more than $3,000 in net capital losses in a taxable year, then the excess losses can be carried forward into future tax years. A taxpayer may then use the losses to offset capital gains in a future tax year or can claim the capital loss deduction again.

Cryptocurrency fees and cost basis

In 2020, with itemized investment-related expense deductions eliminated, taxpayers can account for all fees the same way by adding them into their buying and selling costs. 

Cryptocurrency traders can save money on their transaction fees by adding the cost of fees into their cost basis when reporting buy and sell transactions. The cost basis is the original price of an asset, which is used to determine a capital gain or loss when the asset is sold.  

Example of fees when buying crypto 

If a taxpayer buys 1 Bitcoin when 1 BTC = $10,000, and pays $50 in fees, then the IRS allows you to report a cost basis of $10,050. Adjusting for fees allows a lesser realized taxable gain.

Example of fees when selling crypto 

This same example applies inversely for fees when selling cryptocurrency for a profit.

If the taxpayer purchased BTC at $10,000, sells it for $11,000 and pays $50 in fees, then the IRS allows the taxpayer to deduct the $50 from the proceeds amount. In this example, the taxpayer would report proceeds of $1,050 from selling the crypto.

Forks and Airdrops

The IRS has also provided guidance on how to tax crypto that a trader may receive as the result of a blockchain hard fork — when one blockchain upgrades and splits to form a new blockchain and corresponding crypto asset. The IRS states that hard forks that result in an airdrop of a new cryptocurrency — meaning you automatically receive that new crypto asset if you own the asset that is being formed — are akin to a dividend for tax purposes. 

How to file your crypto-taxes with TaxBit

If your trading on Edge is taxable, a Form 1099-B tax statement — which contains your taxable trading activity on Edge — is now available, as has already been to your email. 

TaxBit automates the process of producing the necessary tax forms for cryptocurrency traders. After a taxpayer downloads their IRS 8949 tax form from within their TaxBit account, they can incorporate the completed form into their full tax return.

If a taxpayer is filing their own taxes, then they can easily upload their IRS 8949 tax forms into a popular tax filing software such as TurboTax, TaxAct or TaxSlayer. Alternatively, if the taxpayer uses an accountant to file their tax return then they can provide their accountant with the completed IRS 8949 tax forms to have them incorporated into their tax return.

All previous tax years included

As a cryptocurrency tax software founded by CPAs and tax attorneys, TaxBit believes in helping taxpayers comply with their tax obligations — even retroactively. To this end, TaxBit’s Plus and Pro plans include all prior-year tax forms.

We’ve found that many cryptocurrency traders are just now filing their crypto taxes for the first time, based on the new crypto-related question on their income tax form. Some taxpayers may wish to amend prior-year tax returns to report their cryptocurrency activity in previous tax years. 

TaxBit includes prior-year tax forms to lessen the burden of taxpayer’s backfiling to retroactively tax compliant.

All Edge customers can save 10% off the annual TaxBit subscription by using this link to sign up on TaxBit: https://taxbit.com/invite/edge/

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