The Proper Way to Report Cryptocurrency on Form 1040 Schedule D and 8949

The Proper Way to Report Cryptocurrency on Form 1040 Schedule D and 8949

Cryptocurrency investing has exploded in popularity in recent years. However, reporting crypto transactions on your taxes can be confusing. This comprehensive guide will walk you through step-by-step how to properly report your crypto gains and losses on IRS Form 1040 Schedule D and Form 8949.

What is Cryptocurrency?

Cryptocurrency is a digital asset that can be used as a medium of exchange. Bitcoin is the most well-known cryptocurrency, but there are now over 5,000 different cryptocurrencies in existence. Cryptocurrencies use cryptography and blockchain technology to secure transactions. They are decentralized and not issued by any government.

Do I Need to Report My Crypto Transactions?

Yes, you must report all crypto transactions, even small personal transactions like buying a cup of coffee with crypto. According to IRS Notice 2014-21, cryptocurrency is treated as property for tax purposes. This means that:

• Trading crypto to crypto is a taxable event
• Selling crypto for fiat currency like USD is a taxable event
• Using crypto to buy goods or services is a taxable event (capital gain or loss)

Anytime you dispose of crypto, whether for profit or for personal use, it is considered a taxable event and must be reported.

What Forms Do I Use to Report Crypto?

You report crypto gains and losses on IRS Form 1040 Schedule D and Form 8949. Here’s an overview of what each form is used for:

• Form 8949 – Used to list each individual crypto transaction
• Schedule D – Summarizes your net capital gains and losses

You must fill out Form 8949 first, then use it to complete Schedule D. Form 8949 provides the details, while Schedule D shows the totals.

How to Fill Out Form 8949

Form 8949 is where you will list every single taxable crypto transaction you made during the tax year. This includes:

• Trading crypto to crypto
• Selling crypto for cash
• Using crypto to buy goods or services
• Receiving crypto as income

For each transaction, you will need to provide:

• Date acquired
• Date sold or traded
• Proceeds (amount received)
• Cost basis
• Gain or loss

You can download transactions directly from your crypto exchanges and wallets into crypto tax software to automatically populate Form 8949. If doing it manually, be sure to keep detailed records.

You’ll list short-term gains/losses (held 1 year or less) separately from long-term (held over 1 year). You may need to use multiple Form 8949 pages to list all transactions.

Key Tips for Form 8949

• Report all transactions, even small ones
• Calculate cost basis using FIFO, LIFO, average cost, or specific identification
• Group identical crypto assets together (all ETH transactions, all BTC transactions, etc)
• Make sure to transfer totals to Schedule D

How to Fill Out Schedule D

After you have entered all of your crypto transactions on Form 8949, you will total up capital gains and losses on Schedule D. Here’s how:

1. Add up short-term gains and losses from Form 8949. Put the totals on Schedule D.
2. Add up long-term gains and losses from Form 8949. Put the totals on Schedule D.
3. Apply any capital losses carryover from previous tax years.
4. Total your net capital gain or loss for the year.

The totals from Schedule D will flow into your Form 1040. If you have a net capital gain, it will be taxed at your ordinary income tax rate. A net capital loss can be used to offset other capital gains or deducted up to $3,000 against ordinary income.

Tips for Schedule D

• Double check totals from Form 8949
• Remember to carry forward any unused capital losses
• Note Section 1256 contracts like crypto futures receive special tax treatment

How to Report Crypto Income

In addition to capital gains and losses, you may also need to report crypto as ordinary income if:

• You received crypto as payment for goods/services
• You received crypto as a reward or airdrop
• You mined crypto
• You staked crypto

This income is reported on Form 1040 Schedule 1. The fair market value of the crypto on the date received becomes your taxable income. Crypto income is taxed at your ordinary income tax rate.

Common Crypto Tax Pitfalls

Here are some common mistakes to avoid when filing your crypto taxes:

• • Not reporting crypto earned from mining or staking
  • Not reporting small crypto transactions
  • Incorrect cost basis – Using the wrong cost basis method can lead to inaccurate gain/loss calculations. Be sure to use FIFO, LIFO, specific ID, or average cost consistently.
  • Not reporting crypto gifts or tips – If you receive crypto as a gift or tip, you must report it as income based on the value at the time received.
  • Missed or incorrect Form 1099-Ks – You may receive a 1099-K from crypto exchanges, but it may be incorrect or missing trades. Don’t rely solely on 1099-Ks.
  • Stolen crypto – If your crypto is stolen, you can claim a theft loss deduction, but this involves additional reporting requirements.
  • No records for altcoins – Many minor altcoins don’t have detailed transaction histories or records, making it difficult to calculate taxes.
  • Airdrops – Receiving an airdrop of free crypto should be reported as ordinary income when received.
  • Chain splits – Hard forks that result in new coins may need to be reported if you end up with possession of the new coins.
  • Crypto stored overseas – Foreign financial asset reporting requirements may apply if you hold crypto in foreign exchanges or wallets.
  • Audit triggers – Trading significant amounts of crypto can increase your chances of being audited. Keep excellent records.
  • Amended returns – If you discover errors or omissions, you may need to file an amended tax return to correct them.

The complexities of crypto tax reporting mean it is usually beneficial to use crypto-specific tax software that can handle transaction data from exchanges and automate Form 8949. Consulting a crypto tax professional can also help avoid mistakes. Taking the time to report crypto transactions accurately is critical, as the IRS is increasingly focused on enforcement in this area.