How to Handle Cryptocurrency Tax Reporting When Trading Between Coins and Tokens

How to Handle Cryptocurrency Tax Reporting When Trading Between Coins and Tokens

Hey there crypto traders! Dealing with cryptocurrency taxes can be super confusing and complicated, especially when your trading between different coins and tokens. I totally get it – I’ve been there myself. The IRS rules on crypto taxes are still kinda fuzzy and keep changing, so it’s hard to keep up. That’s why I wanted to write this article to try and break it down in a simple way so you don’t get hit with penalties for mistakes. I’m not a tax professional or anything, just a fellow crypto trader sharing what I’ve learned. So take this all with a grain of salt and maybe consult a tax pro too if you need more help. Ok, let’s get into it!

The Basics – Crypto is Taxed as Property

First thing’s first – the IRS treats cryptocurrency as property, not currency. So that means any time you sell, trade, or otherwise “dispose” of your crypto, it can trigger a taxable event. It doesn’t matter if you’re trading bitcoin for ethereum, or bitcoin for actual dollars – it’s all taxable.

Taxable Crypto Events

Here’s some of the main events that can trigger crypto taxes:

• Trading crypto to crypto – For example, using bitcoin to buy ethereum
• Selling crypto for fiat currency – For example, selling bitcoin for U.S. dollars
• Using crypto to buy goods or services
• Receiving crypto as income, like for mining or staking rewards
• Getting free crypto from airdrops or hard forks

Pretty much anytime you dispose of crypto or receive crypto, it can be a taxable event. The only time it’s not taxable is if you just buy crypto and hold onto it without doing anything else.

How Much Tax You Owe

The amount of tax you’ll owe depends on a few things:

• How long you held the crypto before disposing of it
• How much profit you made (or loss you incurred)
• What tax bracket you fall under based on your total income

Crypto held for less than a year before selling or trading it is taxed at your ordinary income tax rate, which can be anywhere from 10% to 37%, depending on your tax bracket. Crypto held for over a year is taxed at long-term capital gains rates, which range from 0% to 20%.

For example, say you bought 1 bitcoin for $10,000 and sold it 6 months later for $15,000. That’s a $5,000 profit. Since you held it less than a year, that $5,000 would be taxed as ordinary income at whatever tax rate you fall under. If you’re in the 22% bracket, you’d owe $1,100 (22% of $5,000) in taxes on that sale.

Now let’s say you bought 1 ethereum for $1,000 and sold it 18 months later for $3,000. That’s a $2,000 profit. Since you held for over a year, the $2,000 profit is taxed at the long-term capital gains rate, which could be as low as 0% depending on your total income and deductions for the year.

Calculating Cost Basis

To figure out your profit or loss on each crypto transaction, you need to know the cost basis – how much you paid for the crypto originally. This gets tricky when trading between coins.

For example, say you bought 1 bitcoin for $10,000. Later, when bitcoin was worth $50,000, you traded 0.5 bitcoin for 5 ethereum. To calculate your cost basis for the ethereum, take the $10,000 original purchase price of the 1 bitcoin and allocate it proportionally based on the amount you traded. So your cost basis for the 0.5 bitcoin traded is $5,000 (half of the original purchase price). This becomes your cost basis for the 5 ethereum you received in return.

Now let’s say you later traded 1 ethereum (worth $3,000) for litecoin when ethereum was trading at $3,000. Your cost basis for that 1 ethereum would be $1,000 (one fifth of the $5,000 cost basis for the original 5 ethereum). So if you traded it for litecoin worth $3,000, you’d have a $2,000 taxable gain on that trade.

As you can see, you have to track the cost basis for each new coin you receive, based on the original purchase price and allocation. It gets complicated fast! That’s why using crypto tax software can be a huge help.

Crypto Tax Software

Because calculating cost basis and tracking gains/losses on each trade can be such a headache, I highly recommend using tax software built specifically for cryptocurrency. Some popular options include Koinly, TokenTax, CryptoTrader.Tax, and others.

These platforms connect to your exchanges and wallets via API to automatically import your full trading history. Then they calculate your capital gains, income, and losses on each transaction so you can generate the required tax reports. You can even import the data into TurboTax or give it to your accountant to complete your taxes.

The key benefit of crypto tax software is it takes care of the complicated calculations and record keeping for you. You don’t have to figure out cost basis across hundreds or thousands of trades – it’s all done automatically. This can literally save you weeks of work!

Avoiding Penalties

The IRS has been ramping up enforcement of crypto tax reporting, so you want to make sure you get it right. Here are some tips to avoid penalties:

• Keep detailed records of all your crypto transactions
• Calculate cost basis for each coin you receive
• Report all taxable crypto transactions on your return
• Pay your crypto taxes owed by the filing deadline
• Ask for help from a tax pro if you need it

As long as you report your crypto gains/losses accurately and pay any tax owed on time, you should avoid any penalties from the IRS. The main thing is documenting your transactions so you can calculate cost basis and track gains/losses. Using crypto tax software makes this a breeze.

The Bottom Line

Dealing with crypto taxes can be confusing, but taking the time to understand the basic rules will help you stay compliant and avoid issues with the IRS. The key things to remember are:

• Crypto is taxed as property, not currency
• Trading one coin for another is a taxable event
• You owe taxes on any gains you realize from disposing of crypto
• Short-term gains under 1 year are taxed as ordinary income
• Long-term gains over 1 year are taxed at capital gains rates
• Keep detailed records to calculate cost basis and track gains
• Use crypto tax software to automate the reporting process

I know crypto taxes can be frustrating to deal with. But taking the time to do it right will save you big headaches down the road. Let me know if you have any other questions! I’m always happy to chat more about crypto taxes.