Determining your crypto taxation starts with knowing if your crypto transactions are taxable or not. Below are the most common crypto activities that you do need to report on your tax form:
- Selling your crypto for cash or converting to a stable coin.
- Trading one cryptocurrency for another digital currency (such as Ethereum).
- Using cryptocurrency at a merchant as payment, including paying with a crypto debit card.
You may also receive income from crypto. Here are some examples:
- Receiving airdropped tokens resulting from a hard fork. An airdrop is a transfer of free cryptocurrency from a crypto project into users’ wallets.
- Staking or mining cryptocurrency
- Getting paid in crypto
- Interest income from lending
Most crypto investors have only bought and sold crypto on a crypto exchange or wallet, creating short and long-term capital gains or losses.
You will create ordinary income if you have earned crypto from a job, mining, staking, or earning interest.
If you earn ordinary income in your names by default, you are operating as a sole proprietorship which will show up on schedule C, subject to state and federal income taxes.
Like any ordinary income you have earned, if high enough, you may want to structure an S corporation or LLC taxed as an S corporation to save on self-employment taxes which is 15.3%. Plus, an LLC taxed as an S corporation will keep the income off schedule C, which is much more likely to be audited by the IRS.
Five steps to file your cryptocurrency taxes:
- Calculate your crypto gains and losses. We recommend you use crypto tax software. There are many crypto tax software on the market. If you are outside the U.S., you will use Cointracking.info to organize your transactions to determine a gain or loss so you can file a return with a tax professional in your own country. Another alternative tax software for U.S. residents is Taxbit.com. Their software at the free level works well with traders and investors.
- Complete IRS Form 8949
- Include your totals from 8949 on Form Schedule D
- Include any crypto income on Schedule 1 (or Schedule C if you are engaging in crypto taxes as self-employed-a mining operation is an example). For example, if you earn staking reward income that goes on other income on Schedule 1, line 8z, added to your personal 1040 tax return.
- Complete the rest of your personal tax return. If you set up your exchange in the name of a business entity, and that entity has a return, such as an LLC taxed as an S corporation, that return would also be filed. A single-member LLC disregarded for tax purposes where the owner is the individual does not file a U.S. return for the LLC unless it is owned by a non-resident and would file form 5472 and pro forma 1120.
NCP can help you with your digital LLC for U.S. and non-U.S. residents. We work with a U.S. exchange’s VIP team that will help speed up the time to set up your U.S. crypto account (minimum capitalization is $10K). Go here to learn more about our digital LLCs.
In most cases, crypto income should be reported in personal income or self-employment income. Any time you are filing a Schedule C, you may be entitled to business expenses, and any loss on your Schedule C may be used to offset earned income. The key is to make sure you operate a mining business, not a hobby. If you are deemed to be operating a hobby, you may only offset your losses that equal your income.
If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B.
The key with crypto tax software is to fix any missing or duplicate transactions after using the API feature or CSV to import your data from your exchanges and wallets. Cleaning up your missing and duplicate transactions will lead to filing a more accurate 8949 form with your personal tax return.