Imagine you’re in a maze, but instead of walls, you’re surrounded by numbers, forms, and some very confusing tax laws. Welcome to the world of cryptocurrency taxation! As you zigzag through this financial labyrinth, remember that the IRS is watching, and they’ve got a new interest in your digital treasure trove. It’s vital to get your ducks—or coins—in a row when tax season rolls around. From an Atlanta cryptocurrency attorney, here’s everything you need to know.
Why you can’t ignore crypto at tax time
Cryptocurrency might seem like a fun investment, like a digital game, but the IRS treats digital asset transactions the same traditional property transactions.
Record everything. Every transaction, no matter how small, needs to be documented. Here are the details you need to keep track of:
- Purchase and sales dates and amounts
- Fair market values in USD at the time of the transaction
- Detailed logs of trades and exchanges
Maintaining detailed records ensures you can substantiate your tax return claims, adhering to the Internal Revenue Code requirements.
Reporting crypto taxes
If you engage in transactions involving digital assets, it’s mandatory to report them, regardless of whether they lead to capital gains or capital losses.
Gather your crypto tax documents
Before you sit down to crunch the numbers, make sure you have all your documents in hand:
- Transaction histories: Download comprehensive logs from each exchange and wallet used.
- Exchange statements: Collect all tax documents provided by cryptocurrency exchanges.
- Payment records: If you’ve received cryptocurrencies as payment, note the market value at the time of receipt.
These documents are your first line of defense if the IRS knocks on your door.
Calculate gains and losses
This part can be tricky, but it’s the crux of your crypto tax obligations:
- Identify the type of asset: What exactly did you sell or trade?
- Determine the basis: Understand the original value of your asset when acquired.
- Calculate the gain or loss: Subtract the basis from the value at the time of sale or trade.
Knowing your gains and losses will guide you in filling out the right forms, like the 8949 and Schedule D.
Determine your basis
The next step in the process is determining the basis or the cost of your crypto assets. To do this, you’ll need to know:
- The type of digital asset acquired
- When you acquired the digital asset, down to the time of day
- How much of the asset you obtained
- A fair market value at the time of acquisition
The IRS website has more information if needed.
Report using the appropriate form
The type of form required varies based on the transaction type:
- Capital asset transactions: Use Form 8949 for sales, exchanges, or disposals of digital assets held as capital assets.
- Ordinary income from digital assets: Report income from everyday activities on Form 1040 (Schedule 1).
- Gifts of digital assets: Use Form 709 to report digital assets given as gifts.
- Income for employees: Report wages received in digital assets on Form 1040 for employees.
- Income for independent contractors: Use Schedule C (Form 1040) to report payments received in digital assets.
- Business transactions: For digital asset transactions with customers, report on Schedule C (Form 1040).
Visit the IRS website for more details.
A tip for the future
Starting in January 2026, all cryptocurrency brokers will need to issue Form 1099-DA for the 2025 tax year. This will make your activities more transparent than ever and simplify the IRS’s auditing process. Prepare now to avoid surprises later!
A crypto lawyer can help
Cryptocurrency taxes are undoubtedly complex, but with meticulous record-keeping and strategic planning, you can navigate this intricate landscape. Hiring a seasoned cryptocurrency lawyer might also be a wise move to avoid IRS issues. Remember, it’s better to be safe than sorry when dealing with the IRS and your digital assets. Stay informed, stay compliant, and let your crypto journey be a tax-smart one.