People are unsure if they need to report crypto-to-crypto transactions on their taxes. It’s hard to keep up with all the rules and regulations when it comes to taxes, especially when it comes to something as new as cryptocurrencies.
We’re here to help clear things up. Below we’ve answered some of the most commonly asked questions about crypto-to-crypto transactions and taxation.
Is crypto to crypto taxable? Yes, crypto to crypto is taxable. Even if no money changes hands, the IRS considers exchanges of one type of cryptocurrency for another to be taxable.
Is Crypto To Crypto Taxable?
Crypto to crypto is taxable. Even if no money changes hands, the IRS considers exchanges of one type of cryptocurrency for another to be taxable. It’s the same as selling your cryptocurrency for fiat currency. It does not matter which crypto you’re selling it for; if it’s a stablecoin or an altcoin, it’s still a taxable event. You’ll pay short or long-term Capital Gain Tax on any capital gain you earn as a result of the transaction.
If you’re buying crypto with another cryptocurrency, for example, BTC for ETH, this is a taxable event in the United States. The IRS considers this to be two separate transactions. Let’s assume that you want to purchase ETH using BC as an example.
The IRS considers you selling your BTC for a non-existent amount of dollars. You then use these made-up funds to purchase ETH. You must pay tax on the trade of the BTC, not the acquisition of the ETH, even though you never received any fiat currency.
In this example, you’d use the cost basis of your BTC and deduct it from the fair market value of BTC on the day you acquired ETH to calculate your capital gain.
Calculating Taxes On Crypto To Crypto
In the United States, you must record the value of your bitcoin in local currency at the time of purchase. Because most exchange records lack a reference price point, and records between exchanges are not easily compatible, this may be very time-consuming to accomplish manually.
It takes time to calculate your crypto taxes, especially if you trade at scale. You may complete it manually or utilize a tax calculator to save hours. Follow these actions to compute your crypto taxes manually:
- Identify any crypto transactions that you completed during the entire financial year for which you’re reporting.
- Determine which transactions are subject to income tax and which are subject to capital gains tax.
- Identify the cost basis for each transaction according to your chosen accounting technique.
- The current capital gains and losses, income, and expenses must be calculated.
- You’ll then need to notify the IRS (yes, every single one), as well as any income from crypto, about your crypto disposals, profits from your disposal, and capital gains or losses.
How To File Crypto To Crypto On Your Federal Taxes
In the eyes of the IRS, cryptocurrency is not a genuine currency. According to IRS Notice 2014-21, the IRS considers cryptocurrencies to be property for tax purposes. Schedule D and/or Form 8949 should be used if necessary to report capital gains and losses from cryptocurrency transactions.
You submit your crypto taxes with your annual tax return, but you’ll also need a few other documents.
File crypto disposals, capital gains, and losses on Form Schedule D (1040) and Form 8949.
File crypto income on Form Schedule 1 (1040) or Form Schedule C (1040).
Follow 5 easy steps to submit your crypto tax to the IRS:
- Calculate your crypto taxes. You’ll need to know your capital gains, losses, income, and costs.
- After you’ve estimated your capital gains and losses, fill out the tax form for bitcoin – Form 8949 – with all of your taxable transactions.
- Include the net capital gains and losses from Form 8949 on Schedule D, along with your short-term and long-term capital gains and losses.
- You must complete Schedule 1 if you have crypto income from airdrops, forkings, liquidity pools, bonuses, and other sources. If you’re self-employed or operate a cryptocurrency company, use Schedule C instead.
- Attach all of the forms you’ve filled out and submitted. This is where you should send it to the IRS.
State Taxes On Crypto To Crypto
The majority of states have yet to provide guidance on the tax treatment of virtual currency and cryptocurrency. Sales and use tax implications are significant from a state tax perspective because whether or not the purchase of virtual currency or cryptocurrency is treated as a taxable sale.
Taxpayers should also be aware of how to compute and report sales tax on purchases made using virtual currency or cryptocurrency. Taxpayers in states without laws regulating the use of virtual currency or cryptocurrency may wish to look at their state’s approach to taxation other types of currency and intangible property, as well as whether or not the state follows federal tax rules for convertible virtual currency.
Conclusion
Conclusion paragraph: The IRS considers exchanges of one type of cryptocurrency for another to be taxable. In other words, if you trade Bitcoin for Ethereum or Litecoin, the transaction is considered a sale and will likely incur capital gains tax on any profit from the exchange. If this sounds like something that applies to your business, make sure you consult an accountant who specializes in crypto taxes to help ensure compliance with all relevant laws before engaging in any transactions.