Crypto Tax Form: How to Report in 2023

The crypto world can feel mysterious and intimidating – but with a bit of knowledge, it’s possible to make sense of the complexities involved.

Navigating your way through cryptocurrency taxes can be overwhelming, but understanding and following the proper steps will make all the difference. With the pieces in place, you’ll see how everything fits together and complete the puzzle.

How does the IRS classify crypto?

The Internal Revenue Service (IRS) classifies cryptocurrency as property for federal tax purposes, meaning you should report any earnings from trading or using cryptocurrency on your taxes. This includes income from crypto exchanges between different cryptocurrencies.

Where can I track crypto transactions? You must use the block explorer specific to the cryptocurrency to track crypto transactions. Popular block explorers for Bitcoin include blockexplorer.com, blockchain.com, blockcypher.com, and btc.com.

What forms do I need to report cryptocurrency?

To accurately report your crypto earnings, you will need a few forms – Form 1040, Form 8949, and Schedule D, along with Schedule C or SE if you’re reporting self-employment income.

Form 1040

Form 1040 is the form used to file an annual income tax return for individuals who have earned net earnings during the year. You must use Form 1040 for any ordinary income, like wages or self-employment income.

Before tackling your crypto-related tax reporting, you must first indicate if you participated in any cryptocurrency activity on your Form 1040. Additionally, you may use other tax forms to report your cryptocurrency activities for that tax year.

Form 8949 – Capital Gains and Losses from Cryptocurrency Transactions

Whether you’re trading digital assets like cryptocurrency, stocks, bonds, or real estate, you must keep careful track of your capital gains and losses. That includes any money made – or lost – on a sale.

When filing taxes, it’s essential to include form 8949 with Schedule D. You’ll also need to make adjustments for the cost of acquiring the asset and any other associated expenses with selling it. Additionally, if the information on Form 1099-B from your platform or brokerage needs updating, this form can help you do that.

Remember that even if you don’t profit from a trade, all virtual currency transaction activity must be reported accurately here!

Understanding fair market value (FMV)

In the context of securities, such as stocks and bonds, the FMV is usually the price at which the guarantee is traded on a public stock exchange or another open market.

When do I need to report cryptocurrency on form 8949?

Your crypto transactions must be reported on Form 8949 by the date of filing your tax return (including extensions). All other capital transactions must be written by their settlement date – meaning when ownership officially transfers between parties involved in the trade.

Schedule D

Schedule D is part of a more significant personal tax return that records short-term and long-term capital gains and losses related to virtual currency trades throughout the year. After filling out 8949 forms, you’ll take all your totals from these forms and transfer them over neatly to your Schedule D summary table for additional processing.

Schedule C and Schedule SE

Suppose you’re self-employed and made money from cryptocurrency or any other payment type. You must complete Schedule C, Profit and Loss from Business, to report your income and expenses.

Additionally, your total profit is $400 or more. In that case, the government requires you to use Schedule SE, Self Employment Tax, to calculate the Social Security and Medicare taxes owed from your crypto work.

Rewards that don’t count as self-employment should be reported on a different form – Schedule 1 – Additional Income and Adjustments to Income. Be sure each entry is accurate for the best results!

How to report your taxes from crypto earnings

If you’ve had any activity related to virtual currency during 2022, here’s how you can accurately report it on your taxes involving short-term and long-term capital assets:

Step #1: Calculate your crypto gains and losses

But accurately calculating these is key for adequately reporting your income at the end of each tax year.

When trading the cryptocurrency or any other asset, it’s essential to keep track of how much the investment was worth when disposed of, in addition to its original cost basis. This cost basis may include the purchase price and any additional fees associated with the exchange or transaction.

Example: John recently sold a portion of his cryptocurrency holdings and, based on the difference between the disposal value and cost basis of those assets, realized a significant capital loss.

At disposal, each asset was worth $10,000, while their combined cost basis implied a total outlay of $15,000. This resulted in a capital loss of $5,000 when filing taxes, which John can use as an offset to any taxable gains he has realized throughout the year.

By keeping a close eye on such crypto gains and losses, you can be confident that you are optimizing your total tax liability at the end of the year.

Step #2: Fill out tax form 8949

Report your crypto earnings on form 8949

To file crypto taxes, you fill in the information at the top of the form and select one of three checkboxes available in Part I (short-term transactions) and Part II (long-term transactions).

If you have received a 1099-B from an exchange, boxes (a) or (b) should be selected for short-term gains and (d) or (e) for long-term gains, depending on whether you report the basis of the asset to the IRS.

For exchanges not reported on form 1099-B or that do not fit into either box (a), (b), (d), or (e), box (c) should be selected for short-term gains, and box (f) for long-term gains. The same requirements apply for the 2022 tax year.

Calculate the entries in this row, including all aspects of each transaction

In the “Description of property” section, specify the asset sold, exchanged, or spent (for example, 1.5 BTC). The “Date acquired” and “Date sold or disposed of” sections will list when you bought and sold the asset, respectively.

Your proceeds equal the USD value of what was sold, exchanged, or spent. The cost basis is the total USD value of what you purchased.

If there is any adjustment, you’ll have to enter the code in column (f)and the adjustment amount in column (g).

Finally, subtract column (e) from column (d) and combine the result with column (g) to get the gain/loss (column (h)). After filling out your transactions on Form 8949, you need to enter the totals in the aggregate boxes at the bottom of the form.

Step #3: Report the totals from your crypto 8949 on Schedule D

For short-term (1 year or less) and long-term capital gains and losses, list the totals separately on this form, as they are subject to different tax rates. Schedule D includes any gains and losses from cryptocurrency

Finally, if you had any crypto capital losses in previous years or are planning to carry losses forward from the current tax year to future years, report these details on Schedule D too.

Step #4: Report any ordinary crypto taxable income on the 1040 Schedule 1. For self-employment earnings, use Schedule C

When filing your cryptocurrency taxes, you’ll need to report any crypto-taxable income that isn’t from self-employment on Form 1040 Schedule 1. This form asks if you’ve received a reward, award, or payment for property or services – all considered ordinary income.

You must also include crypto income from mining and staking, airdrops, hard forks, and crypto lending interest in the ‘Other Income’ section on line 8z.

If you’re an independent contractor who gets paid in crypto, then you should report your earnings on Form 1040 Schedule C – this is true even if some come from a hobby or casual activity.

Self-employed people can deduct expenses related to their work – like equipment and energy costs for miners – on Form 8829 Expenses for Business Use of Your Home.

Step #5: Complete the rest of your tax return, then file and pay your taxes

Once you have reported your crypto taxes, it’s time to finish up the rest of your tax return. When you complete it, you can have your tax advisor file it. After that, you must pay your taxes and be all set!

In Conclusion

As crypto investors, you must be aware of the crypto tax forms and regulations you must follow for your investments to remain compliant. We hope these steps make filing taxes easier so crypto investors can focus more on growing their portfolios rather than worrying about paperwork.

If you are unsure when completing a crypto tax return, you can consult a qualified professional from XOA TAX Team who will guide you through the process step by step.

Frequently Asked Questions (FAQs)

Will I get 1099 for crypto?

If you were doing crypto mining or receiving awards for your crypto services, the payer would send you either a 1099-MISC or 1099-NEC form. These forms tell you how much you earned from those activities.

How does IRS know if you own crypto?

The IRS can discover if you own cryptocurrency in four ways:

• Transactions on U.S.-based cryptocurrency exchanges reported via Form 1099-K
• Third-party reporting of payments or rewards via Form 1099-MISC
• Blockchain analysis to identify patterns and link transactions to individuals/entities
• Audits of tax returns and financial records

What happens if I don’t report crypto?

If you don’t report crypto earnings and the IRS audits you, it may result in interest charges, fines, or even criminal charges in the tax bill.

Do I need to report crypto if I didn’t sell?

If you bought crypto and held it in a wallet or platform but didn’t sell, you don’t have to report it to the IRS. It’s like buying and keeping stocks in your portfolio – no taxes are due.

Do I have to report small amounts of crypto?

Yes, you are required to report all cryptocurrency transactions, regardless of the amount. The IRS treats cryptocurrency as property, which means that any time you receive, sell, trade, or otherwise dispose of cryptocurrency, you may trigger a taxable event that requires reporting on your tax return.

This means that even if you only received a small amount of cryptocurrency or made a small cryptocurrency transaction, you are still required to report it on your tax return.

Do I have to report crypto if I sold less than 600?

Even if you sold less than $600 of crypto, you still have to report it. If you made more than that, we must register it with Form 1099-MISC. So make sure to include the amount on your taxes.