1. Keep Records of All Transactions
You must keep track of all your cryptocurrency transactions, including how much you paid for crypto, how long you held it for and how much you sold it for, as well as receipts for each transaction.
While your crypto exchange may provide a 1099-B reporting your crypto transactions to both the IRS and you, it might not record the cost basis, or original amount you paid for your crypto, if you transfer coins between offline cold wallets and your account.
To help address issues like these, “software companies have emerged that will scrub the blockchain to detect transfers between your wallets, whether on an exchange or not, and give you reports of all transactions related to the wallets you give it within a given tax year,” says Jon Feldhammer, tax partner at Baker Botts.
2. Fill Out the Proper Tax Forms
Once you have a record of your crypto transactions, you’ll need to fill out certain tax forms depending on how you used your crypto:
- Form 8949. This form logs every purchase or sale of crypto as an investment. This should include the total number of coins, the date and price you bought, the date and price you sold and your gain or loss for each transaction.
- Schedule D. This form summarizes your total capital gains and capital losses from all investments, including crypto.
- Schedule C. If you received coins from mining, you need to disclose whether you received them as a business or as a hobby. If you’re running a crypto mining business, you may owe self-employment taxes if your income exceeded your expenses for the year.
- Schedule 1. If you report your crypto mining as a hobby, you’d report this income on Line 8 of Schedule 1. You won’t owe self-employment tax, but you become more limited on what you can deduct as an expense.
3. Hire a Professional
Preparing for cryptocurrency taxes can be complicated, especially since the laws surrounding them are constantly evolving. If you’ve made substantial income from crypto, it may be worth hiring a certified public accountant (CPA) who specializes in this type of tax work, so you don’t have the IRS chasing you down later.