What Records You Must Keep for Cryptocurrency Tax Reporting to Avoid Trouble

What Records You Must Keep for Cryptocurrency Tax Reporting to Avoid Trouble

Hey there! Dealing with cryptocurrency taxes can be super confusing. The IRS treats crypto as property, so you need to report gains and losses on buying, selling, exchanging, or even spending crypto. It’s a lot to keep track of! But keeping good records will help you report accurately and avoid issues with the IRS. I’ll walk you through what you need to know, using lots of examples from my own experience.

Track Your Cost Basis

The biggest thing is tracking your cost basis – that’s the amount you paid for each coin. This lets you calculate gains or losses when you sell or trade crypto. For example, say you bought 1 Bitcoin for $10,000. If you later sold it for $15,000, your gain would be $5,000. If you don’t know your cost basis, you can’t accurately report gains/losses.

Make sure to track:

• Purchase date and purchase price for each transaction
• Which coins were bought/sold/traded
• Fair market value on the date you received crypto (like from mining or airdrops)

I like to use crypto tax software that imports my transaction history from exchanges and wallets to make this easier. But you can also track it manually in a spreadsheet.

Keep Records of Transactions

In addition to cost basis, you need records of all your crypto transactions – buys, sells, trades, mining, airdrops, staking rewards, NFT sales, etc. For each transaction, note:

• Date
• Type of transaction (buy, sell, trade, etc)
• Coins involved
• Amount transacted

Exchanges like Coinbase provide transaction history exports, which is super helpful. But if you transact elsewhere, you’ll need to manually record transactions.

One tip – take screenshots! I got audited last year and was asked to provide documentation. Screenshots of transactions in my wallets saved me!

Record Income

You need to report any crypto income, like:

• Mining income – Fair market value of coins mined
• Staking rewards – Value when rewards distributed
• Airdrops – Value when coins received
• Interest – Interest earned on lending/staking
• Hard forks – Value of new coins from forks

Make sure to note date, coins, amounts, and fair market value on date of receipt. This is ordinary income, not capital gains.

Business Activity Records

If you use crypto for business like an LLC or sole proprietorship, you need records for that too! Track crypto received or spent for business purposes. Note date, amount, purpose, etc. This helps calculate crypto-related business income/expenses.

Gifts and Donations

Giving crypto as a gift or donation? Make sure to record date, recipient, coins, and value. This helps the recipient determine their cost basis if they later sell the crypto.

Third Party Records

Exchanges are starting to issue 1099-B and 1099-K forms for crypto activity. But their reports may have errors or omissions, so rely on your own records first. That said, don’t ignore third party 1099s – make sure to reconcile them with your own data.

Record Keeping Tips

Here are some tips for organizing all this data:

• Use crypto tax software to import transactions
• Export reports from exchanges
• Keep a manual spreadsheet as backup
• Take screenshots of transactions, wallet balances, etc
• Save purchase receipts, bank statements, etc
• Back up records offline and/or using cloud storage

The more records you have, the easier it is to prove your tax reporting if audited. And keeping things organized helps a ton when filing your taxes each year.

Tax Forms

So what forms do you actually file? For crypto gains/losses, you report on Form 8949 and Schedule D. Your total goes on line 7 of Form 1040. You may get a 1099-B from an exchange, but you still report totals from your own records.

For crypto income, report on 1040 line 8. 1099-MISC or 1099-K forms may show this income if you received them.

Audit Risks

Okay, so what happens if you don’t keep good records or accurately report? Well, the IRS has been cracking down on crypto tax compliance lately. They can audit your returns for up to 3 years back. Here are some red flags that may trigger an audit:

• Not reporting crypto activity accurately
• Unexplained income
• Not matching 1099 forms from third parties
• Suspicious deductions or business expenses

If picked for an audit, the IRS will ask for documentation like bank statements, transaction histories, receipts, communications, etc. So keeping thorough records now protects you later!

Penalties

If an audit reveals errors, you may have to pay penalties, including:

• Accuracy penalties – 20% of underpaid tax
• Failure to file – 5% per month of unpaid taxes
• Failure to pay – 0.5% per month of unpaid taxes
• Substantial understatement – 20% of understated tax
• Civil fraud – 75% of underpaid taxes

Yikes! You can avoid all this by keeping accurate records up front. I know it’s a hassle, but a little work now saves major headaches later.

Final Tips

Crypto taxes are complicated, but taking the time to track your activity accurately will keep you out of trouble. My top tips are:

• Record cost basis for all holdings
• Keep detailed transaction history
• Note all crypto income received
• Organize records & back up offline
• Reconcile third-party tax forms
• Report accurately on 8949, Schedule D, and 1040

I know that was a boatload of information! But taking it step-by-step and keeping everything organized will set you up for crypto tax success. Let me know if you have any other questions!