Part IV: Reporting, Using Software, and Consequences of Non-Compliance
- HandyTax
- Oct 22, 2024
- 12 min read
Updated: Oct 23, 2024
8. Reporting Your Crypto Taxes
Reporting your cryptocurrency transactions accurately and on time is crucial to staying compliant with the IRS. In this section, we'll cover when you need to pay crypto taxes, the forms required for reporting, and how to file your crypto taxes using tax software or manually with IRS forms.
When Do You Need to Pay Crypto Taxes?
The deadline for paying your crypto taxes aligns with the standard IRS tax filing deadlines for individual taxpayers.
Here's a breakdown of the key dates and considerations:
1) Annual Tax Filing Deadline:
The typical deadline for filing and paying taxes in the United States is April 15, unless that date falls on a weekend or holiday. For the 2023 tax year, taxes are due by April 15, 2024.
Example: If you sold Bitcoin in 2023 and made a profit, you must report the transaction and pay any taxes due by April 15, 2024.
Extensions:
If you need more time to file your taxes, you can request an extension using Form 4868, which gives you until October 15 to file your return. However, you still need to estimate and pay any taxes owed by the original April deadline.
Note: Filing an extension delays only the submission of your tax return, not the payment of taxes. If you owe taxes and do not pay by the April deadline, you may incur interest and penalties.
2) Quarterly Estimated Taxes:
If you are self-employed, a freelancer, or have significant crypto income (e.g., from mining or staking), you may need to pay estimated taxes quarterly to avoid penalties. This is especially relevant if you expect to owe more than $1,000 in taxes for the year.
Estimated tax payment deadlines for 2024 are:
April 15, 2024
June 17, 2024
September 16, 2024
January 15, 2025 (for the final quarterly payment)
Example: If you earned $20,000 in staking rewards during 2023, you should pay estimated taxes quarterly to cover the income tax liability on those rewards.
Forms Required for Crypto Tax Reporting
When reporting your cryptocurrency transactions, you’ll need to complete a few specific IRS forms. These forms allow you to report capital gains and losses from crypto sales, crypto income, and other relevant activities.
1) Form 8949: Sales and Other Dispositions of Capital Assets:
Use Form 8949 to report each of your cryptocurrency transactions where you sold, traded, or disposed of assets. You will list each individual transaction, including the date of acquisition, date of sale or trade, cost basis, sale price, and the resulting gain or loss.
Example: If you sold 1 Bitcoin in March 2023 for $50,000, and your cost basis was $30,000, you will report the $20,000 gain on Form 8949.
2) Schedule D (Form 1040): Capital Gains and Losses:
Schedule D summarizes the total capital gains and losses from Form 8949 and reports them on your main tax return (Form 1040). Schedule D includes short-term and long-term capital gains or losses.
Example: After listing all your crypto trades on Form 8949, you total your gains and losses and report the net result on Schedule D. If you have a net capital gain, it will be added to your taxable income. If you have a net capital loss, you can offset your gains or deduct up to $3,000 of losses against your ordinary income.
3) Schedule 1 (Form 1040): Additional Income and Adjustments to Income:
If you earned cryptocurrency through mining, staking, or as payment for services, you need to report this income on Schedule 1. This schedule captures "other income" that doesn’t fit into traditional wage categories.
Example: If you mined $5,000 worth of Ethereum, you would report this amount as income on Schedule 1.
4) Schedule C (Form 1040): Profit or Loss from Business:
If you are self-employed and use cryptocurrency as part of your business, or if you mine cryptocurrency as a business rather than a hobby, you will report your income and expenses on Schedule C.
Example: If you operate a crypto mining business, you’ll report your mining income on Schedule C and can also deduct business-related expenses like electricity, hardware, and other costs.
5) Form 1099-DA (Digital Assets) (Upcoming in 2026):
Beginning with the 2025 tax year, cryptocurrency exchanges and platforms may be required to issue Form 1099-DA, which will report your gains and losses to both you and the IRS. This form will simplify reporting by summarizing your crypto transactions, similar to how stock brokers issue 1099-B forms for stock trades.
How to File Crypto Taxes
Once you’ve gathered all your forms and transaction data, you can choose one of two methods to file your taxes: using tax software or filing manually with IRS forms.
1) Using Tax Software:
Many tax software platforms, such as TurboTax, TaxAct, and H&R Block, offer support for cryptocurrency reporting. These platforms allow you to import your crypto transactions directly from exchanges and wallets, simplifying the process of generating Form 8949 and other necessary forms.
How to File with TurboTax:
Import your crypto transactions into TurboTax by connecting your exchange accounts or uploading a CSV file of your trades.
The software will automatically generate Form 8949 and Schedule D based on your data.
TurboTax will walk you through the process of reporting income from mining, staking, or other crypto activities.
Once all your information is entered, TurboTax will file your return electronically with the IRS.
Benefits of Using Tax Software:
Simplifies the process of handling multiple transactions.
Automatically generates the necessary forms.
Provides step-by-step guidance to ensure accurate reporting.
2) Filing Manually with IRS Forms:
If you prefer to file your taxes manually, you can download the required IRS forms (Form 8949, Schedule D, Schedule 1, etc.) and complete them by hand or with a PDF editor.
You’ll need to manually list each of your crypto transactions on Form 8949, calculate your total gains and losses, and transfer the data to Schedule D and other relevant forms.
How to File Manually:
Download and fill out Form 8949, listing each crypto transaction.
Complete Schedule D, summarizing your total capital gains and losses.
Include Schedule 1 and Schedule C, if applicable, for reporting income.
Attach all forms to your Form 1040 and mail your completed return to the IRS.
9. Using Crypto Tax Software and Apps
Managing cryptocurrency taxes manually can be overwhelming, especially if you have a high volume of transactions across different wallets and exchanges. Fortunately, crypto tax software simplifies the process by automating the calculation of gains, losses, and income from your crypto activities.
In this section, we’ll explore why using a crypto tax app is beneficial and provide a step-by-step guide to integrating your wallets and exchanges for automated reporting.
Why Use a Crypto Tax App?
Crypto tax apps like Koinly, CoinTracking, CryptoTrader.Tax, and others are designed to streamline the process of tracking and reporting your cryptocurrency transactions. Here are some of the key benefits.
Automation of Calculations:
Crypto tax software automatically calculates your capital gains, losses, and income by integrating directly with your wallets and exchanges. This eliminates the need for manual calculations, which can be time-consuming and error-prone.
The software calculates your tax liability based on your chosen cost basis method (e.g., FIFO, LIFO, HIFO), ensuring accurate tax reporting.
Consolidation of Transactions:
If you trade on multiple exchanges or use multiple wallets, a tax app consolidates all your transactions in one place. This allows you to track your entire crypto portfolio and ensures that nothing is missed when reporting your taxes.
Example: If you use Binance, Coinbase, and a hardware wallet like Ledger, the software will pull in transactions from all sources to generate a complete tax report.
Accurate Reporting:
Crypto tax software generates the required tax forms, such as Form 8949 and Schedule D, with detailed information about your transactions. You can either print these forms to file manually or import them into tax filing software like TurboTax or TaxAct.
Example: After importing your transactions, Koinly will generate a completed Form 8949, listing each crypto trade and its corresponding gain or loss.
Minimizes Errors:
Crypto transactions often involve complex activities, such as trading, staking, or earning rewards, which can be difficult to track manually. Tax apps reduce the risk of errors by automatically classifying and calculating each transaction according to IRS rules.
Supports Global Tax Rules:
Many crypto tax apps are designed to support tax rules from multiple countries, not just the U.S. This makes them ideal for users who operate in international markets or need to comply with different tax authorities.
Cost Basis Flexibility:
The software allows you to choose different cost basis methods (FIFO, LIFO, HIFO, Specific Identification), depending on which method best fits your tax strategy.
10. Record-Keeping and Compliance
Keeping accurate records of your cryptocurrency transactions is crucial for ensuring you can properly report your crypto activity to the IRS and avoid potential penalties. This section will cover the best practices for tracking your crypto buys, sells, income, and transfers and outline how long you should retain these records based on IRS guidelines.
How to Keep Accurate Records of Crypto Transactions
Since the IRS treats cryptocurrency as property, every crypto transaction—including purchases, sales, trades, income, and transfers—must be tracked. Here are the best practices to ensure you maintain accurate records:
1) Track All Transactions:
You need to track every transaction you make, including buying, selling, trading, earning income, and transferring crypto between wallets or exchanges.
Each transaction should include:
The date of the transaction.
The amount of cryptocurrency involved.
The value of the cryptocurrency in USD at the time of the transaction (fair market value).
Transaction fees paid in cryptocurrency.
The type of transaction (buy, sell, trade, income, etc.).
Example: If you sold 1 Ethereum on February 15, 2023, for $2,500, you should record the sale date, the sale price ($2,500), and the original purchase price (cost basis).
2) Document Income from Crypto:
If you receive cryptocurrency as income—whether from mining, staking, or being paid in crypto for services—you must record the fair market value of the crypto in USD on the day you received it.
Example: If you earned 0.5 Bitcoin from freelance work when Bitcoin was valued at $30,000, you should record $15,000 as income for that transaction.
3) Track Transfers Between Wallets:
Transferring crypto between your own wallets or exchanges is not a taxable event, but you still need to keep records to track your cost basis. When transferring, ensure you document:
The amount transferred.
The wallets or exchanges involved.
The date and any fees paid in crypto (fees may trigger a taxable event if paid in crypto).
Example: You transfer 2 Litecoin from your Coinbase wallet to your hardware wallet. While this isn’t taxable, you need to record the transfer and note any transaction fees in Litecoin.
4) Use Crypto Tax Software:
Given the complexity of tracking multiple transactions, it’s highly recommended to use crypto tax software such as Koinly, CoinTracking, or CryptoTrader.Tax to automatically track and consolidate your transactions. These platforms integrate with exchanges and wallets via APIs or CSV uploads, automating much of the record-keeping process.
The software can also calculate capital gains and losses, generate tax reports, and store your transaction history in an easily accessible format.
5) Maintain Receipts and Documentation:
Keep copies of receipts, invoices, and transaction confirmations for all your crypto purchases, sales, and income. This includes exchange records, wallet transaction logs, and any contracts or agreements related to income or payments in crypto.
These documents serve as proof for your cost basis and transaction values in case of an IRS audit.
How Long Should You Keep Crypto Records?
The IRS has specific guidelines on how long you should retain tax-related records, and these rules apply to cryptocurrency transactions as well:
General Rule: Keep Records for at Least 3 Years:
In most cases, you should keep records of your crypto transactions for at least three years from the date you file your tax return. This is the standard statute of limitations during which the IRS can audit your return.
Example: If you file your 2023 tax return in April 2024, keep your crypto records until at least April 2027.
Keep Records for 6 Years in Case of Significant Underreporting:
If you underreport your income by more than 25%, the IRS can audit your tax return for up to six years. It’s recommended that you keep records for six years if there’s any chance of such an error.
Example: If you made a large gain from selling crypto and are concerned about misreporting, you should retain your records for six years.
Keep Indefinitely if You Don’t File a Return or Commit Fraud:
If you don’t file a tax return or if you file a fraudulent return, the IRS can audit your financial history at any time, without any time limitation. In these rare cases, you should retain your records indefinitely.
Carryforward Losses and Other Considerations:
If you report capital losses and intend to carry them forward to future tax years (to offset future gains), keep the records of the original loss until you’ve fully used the carryforward.
Example: If you report a crypto capital loss in 2023 and carry it forward into 2024 and 2025, keep the records of the original loss until you’ve used it completely in 2025.
11. Consequences of Not Reporting Crypto Taxes
Failing to report your cryptocurrency transactions to the IRS can lead to serious consequences, including penalties, audits, fines, and even criminal charges. In this section, we’ll explore the enforcement actions the IRS may take against crypto traders who fail to comply, and outline the potential consequences of not reporting crypto taxes, from fines and interest to possible tax evasion charges.
IRS Enforcement Actions
The IRS has increased its focus on cryptocurrency transactions in recent years, and it has multiple ways to identify and enforce compliance among crypto traders. If you fail to report your crypto activities, here are the steps the IRS may take:
1) IRS Letters: 6173, 6174, and 6174-A:
The IRS has been issuing letters to taxpayers who have engaged in cryptocurrency transactions but may not have reported them accurately. These letters are intended to encourage compliance and educate taxpayers about their reporting obligations.
Letter 6174 and 6174-A: These are no-action letters, meaning they don’t require an immediate response. They are essentially a reminder to review your tax filings and ensure that you’ve correctly reported your cryptocurrency transactions.
Letter 6173: This letter requires action. It indicates that the IRS believes you have failed to report your cryptocurrency transactions and that you may owe taxes. You must either respond with additional documentation or file an amended return. Ignoring this letter can result in an audit.
Example: If you traded cryptocurrency on Coinbase and didn’t report it on your tax return, you might receive Letter 6174-A, reminding you of your obligation to report your crypto gains and losses. If you receive Letter 6173, you’ll need to take immediate action to resolve the issue.
2) Audits:
If the IRS suspects that you’ve underreported your income, including cryptocurrency transactions, they may conduct an audit of your financial records. An audit involves a detailed review of your income, deductions, and other financial activities, and it can be both time-consuming and costly if errors are found.
During an audit, the IRS may ask you to provide transaction records, wallet addresses, and details of your crypto trading activities. If discrepancies are found, you may face penalties and additional taxes.
3) Form 1099 Enforcement:
Starting in 2026 (for the 2025 tax year), cryptocurrency exchanges and brokers may be required to issue Form 1099-DA to both users and the IRS, reporting users' cryptocurrency gains and losses. This will allow the IRS to cross-check taxpayers' reports with the information provided by exchanges, making it easier to identify underreporting.
What Happens if You Don’t Report Crypto Taxes?
Failing to report your cryptocurrency taxes or underreporting your income can lead to a range of consequences, from financial penalties to potential criminal charges.
1) Fines and Penalties:
If you don’t report your cryptocurrency transactions or report them inaccurately, you may face fines and penalties based on the amount of tax owed.
Failure-to-file penalty: If you fail to file your tax return on time, the IRS may charge a penalty of 5% of the unpaid taxes for each month the return is late, up to a maximum of 25%.
Failure-to-pay penalty: If you file your tax return but fail to pay the taxes owed, the IRS charges 0.5% of the unpaid taxes per month, also capped at 25%.
Accuracy-related penalty: If the IRS determines that you underreported your crypto income due to negligence or disregard of rules, you may face an additional penalty of 20% of the underreported tax.
Example: If you owe $10,000 in taxes from cryptocurrency transactions but fail to report or pay it on time, you could face penalties totaling several thousand dollars, depending on how long it takes to resolve the issue.
2) Interest Charges:
In addition to fines, the IRS imposes interest charges on any unpaid taxes. The interest accrues daily from the date the taxes were due until they are paid in full. The interest rate is currently set at 3% above the federal short-term rate.
Example: If you owe $5,000 in taxes from unreported crypto transactions and fail to pay for a year, the IRS will charge interest on the unpaid balance, significantly increasing your overall tax liability.
3) Potential Criminal Charges:
In cases of willful tax evasion, where a taxpayer intentionally fails to report or pay taxes, the IRS may pursue criminal charges. Tax evasion is a federal crime, and the penalties are severe.
Tax evasion can result in fines of up to $100,000 for individuals and $500,000 for corporations. Additionally, individuals can face up to 5 years in prison for criminal tax evasion.
Example: If a taxpayer deliberately hides large cryptocurrency gains to avoid taxes and the IRS uncovers this during an audit, the taxpayer may face criminal prosecution, fines, and even jail time.
4) Civil Fraud Penalties:
If the IRS determines that you have committed fraud—intentionally deceiving or withholding information to avoid taxes—they can impose a civil fraud penalty of 75% of the underpaid tax. Fraud penalties are among the most severe financial penalties the IRS can impose.
Example: If you owe $50,000 in taxes due to unreported crypto transactions and the IRS concludes that fraud was involved, you could face an additional fraud penalty of $37,500.
5) Future Reporting Scrutiny:
If you are audited or receive an IRS letter for underreporting your crypto taxes, your future tax returns may face increased scrutiny. The IRS could be more likely to flag your returns for audits or additional inquiries in subsequent years.
HandyTax: Your Solution for Crypto Taxes
With our support, you can easily manage key aspects like cost basis calculations, crypto income reporting, and tax software integration.
Whether you're tracking crypto gains, managing losses, or staying compliant with IRS requirements, HandyTax simplifies the process.