- 0.1 1. Gather your Trading Information
- 0.2 2. Make Accounting Adjustments
- 0.3 3. Pick an Accounting Method
- 0.4 4.Calculate the Cost Basis
- 0.5 5. File your crypto taxes
- 0.6 How to File for an Extension
- 1 How ZenLedger Can Help
Cryptocurrency investing is tough enough. It can be exciting, but stressful. As you trade across exchanges, wallets, coins, and time zones, it is really hard to keep your crypto accounting accurate. ZenLedger is here to help you with your accounting and taxes to make things easier for you. We help you report and file your crypto taxes- working with TurboTax or your CPA. We will also help you anytime you need by phone, email, or chat.
First we can answer some common questions about how to report and file crypto taxes.
Do I have to pay taxes on my Crypto to Crypto trades?
Yes, according to the IRS, you have to report, file, and pay capital gains and income tax on cryptocurrency. Crypto to crypto trades are taxable events. Many people mistakenly believe that you are only taxed when you sell your crypto for cash- but that is false. When you sell your crypto out to cash (US Dollars, Euro, Yen, etc) that is a taxable event.
Also note that in US tax law, when you purchase crypto with cash – that is not a taxable event. You have already been taxed to acquire that cash in some way.
A trade from one crypto to another (BTC to ETH) is a taxable event. Investing in an ICO (selling ETH to purchase XYZ) is a taxable event. Income from mining, staking, airdrops, and forks are a taxable event.
When you have loses, this reduces your tax burden. You can write off losses when you lose coins or get hacked. You can also claim capital losses on your trading, this is called Tax Loss Harvesting.
Stablecoins – stablecoins are not recognized by a tax authority as a foreign currency. Your trade from a cryptocurrency to a stablecoin is the purchase of cryptocurrency and a taxable event. Stablecoins are treated just like BTC or ETH when considering your taxes. The sale of stablecoins to cash is also considered a taxable event- but usually without very large tax implications.
Income – often when you receive new crypto from interest payments, mining, staking, forks, or airdrops- this is considered income. You receive income at market value at the time of receipt of the coin and then you would pay any capital gains or losses depending on how long you hold the crypto before selling for another coin or cash.
Also, when you send crypto between accounts you own – for example from your Coinbase account to your Ledger wallet- this is not a taxable event. This is called a Self Transfer.
Now when we covered the basics, let’s go to 5 steps that you will need to follow to file crypto taxes.
1. Gather your Trading Information
The first step to report your crypto taxes is to get all of your transaction and trading history together. The easiest way to do that (and really the only accurate way taking into account how many transactions, wallets and exchanges you might have) is to use a tax software like ZenLedger. With ZenLedger you can use API connections (this is how computer systems quickly and securely talk to each other) to connect to your wallets. ZenLedger can talk to many exchanges including Coinbase, Coinbase PRO (GDAX), Binance, Gemini, BitMex, Kucoin, and many other exchanges. This allows for a very fast import of your transaction history and very accurate accounting.
We have step by step instructions for you to make this as easy as possible.
This also means loading all of your wallet activity. This is so our system can see all of your non-taxable self transfers and your trading fees- which means that you won’t overpay when you file your taxes.
We can also load in transactions using simple spreadsheets, called csv’s. You can create them yourself or download them from exchanges and wallets.
2. Make Accounting Adjustments
The next step to filing your crypto taxes is to review your transactions and make adjustments. You may see a transaction that has not been marked as a self transfer. Or you may want to claim some coins as lost because they were lost in an ICO or when an exchange shut down.
We offer accountants and savvy traders the ability to optimize their tax returns through manual adjustments.
3. Pick an Accounting Method
When investors sell multiple assets with differing basis, they can either choose to sell the crypto they’ve held the longest first (first-in, first-out – FIFO), or sell the newest ones first (last-in, first-out – LIFO). In theory you can choose which method you would like to apply, however, many in the crypto-tax industry believe FIFO is the only appropriate treatment unless you can specifically identify which coin you are selling. Contact a tax professional if you have further questions.
Let’s look at an example of how these would work:
|Lot Date||BTC||Price||Basis||Current Price||Gain (loss)|
|May 1 2013||10||127.13||1271.3||6263.98||61368|
|Sept 1 2016||5||582.23||2911.15||6263.98||28408.75|
|Nov 1 2017||1||5300.75||5300.75||6263.98||963.23|
Assume on Aug. 13, 2018, we want to sell 8 BTC @$6263.98 per BTC.
FIFO – Applying first-in, first-out, we would sell in the order we purchased; thus we sell:
8 of the 10 BTC purchased on May 1, 2013:
- Our sale would net us $50,111.84. This sale would be offset by the 1017.04 purchase cost of those 8 BTC.
- for a total capital gain of $49049.8
Now, because we held these BTC for longer than 1 year and 1 day, we would apply the 15% long-term capital gains rate for a total tax liability of $7516.78.
LIFO – If we apply LIFO, we sell in the reverse order of purchase. In this case, we sell:
The BTC bought in 2017:
- Total gain – 963.23
- Note – this would be taxed as a short-term capital gain because we have held it for less than a full year (plus a day)
all 5 BTC bought in 2016:
- Total gain – $28408.75
- This will be subject to long-term capital gains because the BTC was bought more than one year ago.
2 of the 10 BTC bought in 2013.
- Total gain – 12273.7. Calculated by taking the sale price of the 2 BTC, 12527.96, and subtracting the cost of 2 coins purchased in 2013 – 254.26
- This will also be subject to long-term capital gains.
Here, it would make more sense to apply LIFO to save on taxes. ZenLedger’s crypto tax calculator allows you to easily see the implications of applying either strategy, so you can pick the one that works for you.
4.Calculate the Cost Basis
The basis of an asset is its cost to you (the amount you paid for it). Note this includes transaction costs, meaning exchange fees should be included when determining the basis.
Bitcoin as Income
The basis of cryptocurrency received as income is a bit different. Since you didn’t actually pay anything, the initial basis is 0, however, you must declare the USD value of the amount received as ordinary income. For example, if you earned some bitcoins consulting, and at the time you were paid the BTC was worth $4,000, that is your basis. Thus, your basis in cryptocurrency that was received (and reported) as income is the Fair Market Value (FMV) when you were paid.
As gifts or Inheritance
Gift recipients receive the giftor’s basis, so if a recipient receives a batch of crypto that was purchased for $1, and sells for $7,000 upon receipt, the recipient has a $6,999 gain per coin (which would likely be a capital gain). For inheritances, the recipient can elect to have a “step-up” in basis to the FMV at the time of inheritance, rather than the decedent’s purchase price.
5. File your crypto taxes
In order to properly file and complete your crypto taxes, you need to know about several IRS forms.
The most popular forms are IRS form 8949 and 1040 Schedule D. In the Form 8949 (see the picture here below) you should include all trades and sells of your crypto along with the date when you acquired this crypto, the date when you sold it, your proceeds (Fair Market Value), cost bases and your gains or losses.
Firstly, you should list all trades you had in this tax year, and after that you have to include the total amount at the bottom, and then transfer this amount to your form 1040 Schedule D (see the picture below). Both IRS form 8949 and 1040 Schedule D must be filed with your annual tax returns.
Submitting taxes on crypto earned as a result of mining
If you mine cryptocurrency as a hobby, you will also need Form 1040 Schedule 1. You will have to include the value of the coins that you earned as a result of mining as “other income” on line 21 of this form.
If you file it this way, it limits your ability to sign off your expenses associated with mining, since your expenses will be subject to the 2% rule.
However, if you own a business entity to run your mining activities, you will report your gains and losses using Schedule C. If you do it this way, you can fully deduct your expenses related to your business. The net profit from your business is subject to income tax.
Foreign Currency Reporting
Do you own $10k worth cryptocurrency in one of the most popular foreign exchanges? Binance (Malta), Kucoin (Singapore), Bitfinex (Hong Kong, China), Jaxx (Canada) and Huobi (Korea) are widely used crypto investors in the US and abroad. If you do have (or had through the course of the year) $10,000 USD or more, you need to report that to the US Government.
According to the so called “The Paul Manifort Rule,” holding over $10,000 USD in a foreign account or accounts at any point during the taxable year triggers a requirement to file Form 114 – Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN). Note that although the filing deadline is the same as the tax return, the FBAR filing is not part of the tax return and is filed separately/directly with FinCEN. For crypto traders, this means that if your holdings at a non-US based exchange exceeded $10,000 at any given point of the year, you will need to file Form 114 with FinCEN. Further, if you have two foreign exchange accounts that each had a maximum of $5,001, then you still need to file an FBAR, since the aggregate is over $10,000.
Filing taxes on crypto held on a Financial Exchange, in a Crypto Bank Account or in a Crypto Managed Fund
On top of that, if you hold your cryptocurrency on a Financial Exchange, in a Crypto Bank Account, or you invested in a Crypto Managed Fund, you may have to file a Form 8938. This form is related to the Foreign Account Tax Compliance Act (FATCA). This act was meant to facilitate financial reporting between the US and more than 110 other countries and over 300,000 Foreign Financial Institutions. Read more about FATCA and its requirements for the US taxpayers.
How to File for an Extension
If you have run out of time and do not think you can file your tax forms by April 15th, you can file a 6 month extension to get your returns in order. Some people only need 15 minutes to get their taxes down by our software, but some people have very complicated transactions and need more time. Once you file the extension request to the IRS, you will have until Oct 15th to file your tax return.
It’s important to note that filing an extension does not mean you don’t have to pay the taxes you owe on April 15. An extension gives you more time to do your accounting and paperwork for the previous year. However, you still have to pay an estimate of what you think you owe on April 15th, even if you filed an extension. Here are the IRS penalties for not filing or not paying what you owe. If you have questions here, consult an accountant or tax professional.
You can use the ZenLedger.io crypto tax tool now for free to help you file your taxes or your extension (IRS tax extension). Here’s the process:
- Either by hand or using a tax tool such as ZenLedger.io, you or your tax professional will need to figure out the capital gains/losses for your crypto trades across all exchanges and wallets you used. Put this number into your total capital gains as you consider your other financial assets such as stocks and bonds.
- Send the IRS a check for the estimated amount before April 15th.
- Fill out Form 4868 online or mail in a paper copy with a registered postmarked date before April 15th….just to be safe.
How ZenLedger Can Help
Grand Unified Accounting: Your Tax Review. ZenLedger provides the most accounting transparency on how to calculate crypto taxes. You don’t have to wonder about how to file cryoto taxes, ZenLedger does it all for you automatically.
Superior Customer Support. With the ongoing IRS campaign to enforce crypto tax control, it’s very important that you file your crypto taxes accurately. You don’t want to be caught unprepared or end up owing more taxes than you were expecting.
ZenLedger’s customer support can help you with more than just navigating our software. While we don’t give tax advice (you need to speak to your CPA or tax professional for that) we do know how to report crypto taxes and we have CPA partners to ensure our solution keeps your taxes accurate. That means we can help you save money on your taxes by providing tools to harvest a tax asset on coins when you’ve lost money, or explain the basics of how and why crypto taxes function the way they do.
We are also here to help you get your data out of your exchanges and wallets. With over two dozen integrations, we know how to get your data out, formatted and easily uploaded. We have more than 70 support articles published and chat support availability online during business hours to answer any questions you have.
Now that you know everything about how to file crypto taxes, you probably don’t want to go through this process alone. We are here to help you! Sign up for ZenLedger today in order to see your tax estimate for free and stay compliant!