The Internal Revenue Service (IRS) has issued a guidance that states all cryptocurrencies are not to be treated as currency, instead they should be treated as property.
As of this rule, cryptocurrencies will now be taxed in a similar way to assets such as stock, bonds and real estate. It is mandatory that all cryptocurrency investors declare their capital gains which have occurred from purchasing and selling cryptocurrency.
If the crypto trader has faced a capital loss, in that case they are permitted to use the loss amount to offset their income. The IRS guidance timeline for 2019 included many additional information related to the crypto taxation process. The highlights are listed below.
- In August 2019
The IRS issued tax notices which consisted of Letter 6173, Letter 6174 and Letter 6174-A. This was sent to over 10,000 taxpayers who had made cryptocurrency transactions.
- On October 9th, 2019
The IRS released another 43 questions and answers on the original guidance subject matter that was issued in 2014 as well as information that specifically addressed forks and airdrops.
- On October 10th, 2019
The IRS released the 2019 Schedule 1 form. This starts off with a question right at the top, “At any time during 2019, did you receive, sell, exchange or otherwise hold any financial interest in any virtual currency?”
How Can I Report Cryptocurrency Taxes Accurately?
The process of accurately calculating and filing your crypto taxes can be a hassle, especially if you have a number of cryptocurrencies in your possession which are spread out through many crypto exchanges. To ease this process and to reduce the chance of errors, you can use the many cryptocurrency tax calculators online.
Once you have chosen a cryptocurrency tax calculator that you feel comfortable with, proceed to fill the IRS required Form 8949.
This form needs to contain a detailed record of all the taxable crypto events related to you in order to authenticate your capital gains or losses for the year.
This form needs to display all the crypto users’ trades and crypto proceeds. Keep in mind that for every cryptocurrency which is traded and/or sold, the original amount it was acquired for (in USD) and also, the date it was acquired first will need to be provided as this will clearly establish the Fair Market Value and cost basis.
Once this is obtained, you can use a cryptocurrency tax calculator to accurately calculate your capital gain or loss for each of your crypto trades.
After you have completed this, proceed to transfer the calculated amount of your capital gains or losses to the next form, called 1040 Schedule. The IRS has stated that both these forms are required to be filed and submitted by all crypto traders.
It is highly recommended that you use a cryptocurrency tax calculator as it can be immensely helpful. It not only calculates your crypto taxes but also comes with many additional features, the most useful one is that it can track the historical prices and dates for each crypto trade.
Why Can’t Crypto Exchanges Produce Accurate Documents When Filing Crypto Taxes?
If you are a crypto trader, you must have noticed that the crypto activities you carried out on multiple crypto exchanges cannot accurately provide you with the correct tax information. This information is extremely important as it is required to be filled in Form 8949.
The main problem stems when cryptocurrency is sent from one exchange to another. The 2 crypto exchanges involved cannot maintain a record of the original date and original price (Cost Basis) when the cryptocurrency was acquired.
This is why many crypto traders are now using a cryptocurrency tax calculator as it can simplify the tax calculating process and greatly reduce any chance of errors.
What are the Best Cryptocurrency Tax Calculators?
BearTax is an extremely simple cryptocurrency tax calculator to use. The platform has the ability to import all your crypto data and transaction history from over 25 major exchanges in order to calculate your capital gains. It can also provide the trader with the necessary documents to file with their crypto taxes.
ZenLedger is a well renowned cryptocurrency tax calculator that has a simplistic and easy to use interface. Zenledger is integrated with all the major leading crypto exchanges and also has support for all major cryptocurrencies and fiat currencies as well.
Zenledger has the ability to calculate your crypto taxes and can also automatically fill out the tax forms. It also has the option to provide the crypto user with a capital gains report, donation and income report as well as closing reports.
TokenTax is another cryptocurrency tax calculator that is worn by other crypto traders to be one of the easiest on the market. TokenTax supports every major crypto exchange and is well known for this reason.
Apart from its cryptocurrency tax calculator services, TokenTax also has additional tools which can aid the user in reporting their cryptocurrency capital gains or losses and income taxes.
TokenTax can automatically import all a trader’s crypto data. This is possible because of their direct connections with all the crypto exchange platforms.
However, if you are a crypto trader that uses a crypto exchange platform that is not compatible with TokenTax, you can upload a file containing all your crypto trading data directly to TokenTax.