Cryptocurrency is treated as property by the IRS, meaning that any transaction involving trade, sale, or exchange of crypto is considered a taxable event just like real estate or stocks.
If you earn less than $600 in crypto income, Coinbase typically does not issue a 1099-MISC form, but you are still required to report this income on your tax return.
Coinbase uses various strategies for calculating gains and losses, including FIFO (First In, First Out), LIFO (Last In, First Out), and HIFO (Highest In, First Out), which can significantly affect your tax liability depending on which method you choose.
If you receive cryptocurrency as a reward or incentive, it is considered ordinary income and must be reported, regardless of whether you received a tax form from Coinbase.
The IRS has broad authority to request user transaction information from crypto exchanges, like Coinbase, through mechanisms such as “John Doe Summons” which can capture data from all users rather than targeting specific individuals.
You are required to report all capital gains on your crypto trading, regardless of your profit amount; there is no minimum profit threshold for the IRS, meaning even a small gain should be reported.
The tax implications vary for different types of transactions; selling Bitcoin for cash is considered a taxable event, while merely transferring Bitcoin between personal wallets is not taxable.
Taxable events in cryptocurrency can include selling a currency for goods or services, trading one cryptocurrency for another, or "mining" new currency which is classified as income if you have expenses associated with it.
Failing to accurately report cryptocurrency transactions can result in significant penalties, including interest charges and potential criminal charges for tax evasion in severe cases.
Aside from federal taxes, state taxes on cryptocurrency transactions can also apply; some states have their own regulations that could influence how you report your taxes.
The IRS Form 8949 is typically used to report capital gains and losses from your cryptocurrency transactions, and the totals are then summarized on Schedule D of your tax return.
Many tax software providers, including TurboTax and CoinTracker, offer specialized features for reporting cryptocurrency transactions, helping to automate the calculation of gains and losses based on your trading history.
Tax-loss harvesting is a strategy that allows you to offset gains by selling cryptocurrencies that have lost value, thus potentially reducing your overall tax liability.
If you donate cryptocurrency to a charitable organization, you can potentially receive a tax deduction for the fair market value of the asset at the time of donation, but you will need to hold the asset for over a year to benefit from this.
In 2023, the IRS began requiring taxpayers to answer a question on their return about whether they engaged in any transactions involving virtual currencies, indicating a push for compliance and transparency.
If you are tracking transactions across multiple wallets or exchanges, tax calculators can simplify the aggregation of this data, but accuracy is dependent on how well you maintain your records.
Cryptocurrency rewards programs, like staking, can create ongoing taxable income, as the earnings are reported as they are earned rather than when redeemed.
The complex nature of cryptocurrency taxation means that many individuals unknowingly underreport their income, leading to compliance issues that can arise years later.
For those who traded cryptocurrencies as part of a business or investment strategy, different tax treatments might apply based on the type of business entity you have chosen (e.g., sole proprietorship vs.
LLC).
The evolving regulatory landscape means that tax treatment of cryptocurrencies may continue to change, emphasizing the importance of staying informed about new laws and guidelines that could affect your tax obligations.