How to Handle Tax Reporting for High Volume Cryptocurrency Traders
The dramatic highs and lows of Bitcoin and the outright explosion of cryptocurrencies over the past couple years have a lot of traders and enthusiasts wondering how to report cryptocurrency on their taxes. This article dives into the specifics of tax reporting for high volume crypto traders.
If you are reading this, you are probably a crypto trader or enthusiast concerned with the process of paying taxes on your trading activity. Maybe you have an automated trading strategy that conducts hundreds of trades every single month, and now you’re realizing that you have no way of calculating what your true tax liability is. Maybe you have lost a lot of money trading cryptocurrency and you now want to claim these losses to save as much money on your tax bill as possible.
No matter your situation, you’ve probably made some trades, and now you want to make sure that you report everything legally on your taxes. How do you do it?
Step 1: Calculate your capital gains/losses
For every trade that you make, even if it is just a coin-to-coin trade, you need to know your cost basis, and you need to know the Fair Market Value of the crypto at the time of the trade. To calculate your gains and losses you just follow this equation:
Fair Market Value - Cost Basis = Capital Gain / Loss
What is Cost Basis?
Cost Basis is the original value of an asset for tax purposes. In the world of crypto, your cost basis is essentially how much it cost you to acquire the coin.
What is Fair Market Value?
In the simplest sense, fair market value is just how much an asset would sell for on the open market. Again with cryptocurrency, this fair market value is how much the coin was worth in terms of US dollars at the time of the sale.
Let’s say you purchase $100 worth of Bitcoin including transaction and brokerage fees. That $100 currently buys about 0.01 Bitcoin. Now let’s say two months later you trade all of your 0.1 Bitcoin for 0.16 Ether. Well at the time of this trade, 0.1 Bitcoin had gone up in value and was worth more than you had originally bought it for at $160. $160 is the Fair Market Value, and $100 is your Cost Basis. This makes your capital gain on the trade equal to $60, and this is the amount that you must report and pay a tax on.
I know what you’re thinking, how in the world am I supposed to do this for every single trade I’ve made over the past year? If you haven’t been keeping a detailed spreadsheet, this could be an impossible task. For high volume traders, the best way to handle this is to simply use crypto tax software like CryptoTrader.Tax. The software will calculate your capital gains liability in a matter of minutes and provide you with an exportable report (8949 form) to give to the tax man.
What if I lost money trading?
The process is exactly the same in the example above; however, because of how crypto is treated for tax purposes, you can actually write off your losses and save money.
Some traders are filing their losses and saving thousands of dollars on their tax bill. You can read through this article to learn how to deal with your crypto losses for tax purposes here.
Okay, I’ve accurately calculated my capital gains and losses, now what?
The next step is to actually pull together the proper forms required by the IRS to report your capital gains or losses.
Step 2: Form 8949 and 1040 Schedule D
The Schedule D is the form that you use to report capital gains and losses from all personal property. This includes cars, artwork, collectibles, stocks and bonds, and yes–your cryptocurrency. This is the form that you will ultimately report your capital gains from your crypto trading activity; however, before filling out the schedule D you must detail all of your trades in the 8949.
To properly fill out the 8949, you will need to know those same things that you needed for the actual capital gains calculation.
The example pictured above shows what one entry on the 8949 would look like. In this example, you have sold 0.5 Bitcoin. You acquired the Bitcoin on 7/16/17, and you sold it on 12/17/17. You sold the Bitcoin for a total proceeds of $9848.00, and your cost basis was $970.00. This led to your gain of $8873.00 (reported in column h).
Continue to list all of your transactions from the calendar year onto this form in the same manner as the example above to complete your 8949. Once you have completed your 8949, you simply need to transfer the sum of your capital gains/ losses onto the Schedule D form. This is the final step in the reporting process. Be sure to keep in mind short-term capital gains vs. long-term capital gains when completing your Schedule D.
Sound like a headache?
If you have a high volume of transactions and trades over the year, you can automate the creation of the 8949 and entire crypto tax reporting process by using CryptoTrader.Tax. You can then give the forms that CryptoTrader.Tax exports to your CPA or tax professional or upload them into your favorite tax filing software like TurboTax.
To recap, the process is not that complicated. Keep track of all of your cryptocurrency trades and necessary data. Use that data to properly fill out the 8949 form. Transfer the total gains from your 8949 onto your schedule D. Send it in with the rest of your tax return.
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Guest Blog by David Kemmerer, CryptoTrader.Tax
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