How to Report Taxes on Cryptocurrency Transactions in the USA

How to Report Taxes on Cryptocurrency Transactions in the USA

As the number of people trading virtual cryptocurrencies in the United States continues to grow, the IRS (Internal Revenue Service) is increasingly scrutinizing the taxation of these digital assets. In their tax forms, there’s a specific question asking taxpayers: Did you sell, receive, or exchange any virtual currency this year? This article summarizes key considerations for reporting taxes on cryptocurrency transactions.

Essential Tax Reporting Knowledge for Cryptocurrency Transactions in the USA
Do You Need to Report Taxes on Cryptocurrency Transactions?

Generally speaking, if you sold virtual currency within the year, regardless of profit or loss, you must report it on your taxes. This is especially true if you used identity information, such as a Social Security Number, to register your cryptocurrency account. The IRS is likely to trace your account through this registration information. Note that receiving virtual currency in any form, like as payment for services, also constitutes taxable income. According to recent statistics, over 35% of digital currency traders in the U.S. entered the market for the first time in 2022 alone, signifying that a large number of newcomers need to understand the correct way to report taxes to avoid potential legal risks.

Key Information: Details on Tax Reporting for Cryptocurrency Transactions in the USA
Essential Information Needed for Tax Reporting

Some cryptocurrency brokerage platforms provide the necessary tax forms, such as Coinbase; however, others like Binance do not. In such cases, traders need to personally record key information: the cost basis, selling price, buying time, and selling time. Certain software can assist in recording this information.
For example, David bought Bitcoin through Coinbase in 2021 and sold it in 2022, realizing a 15% profit. Although he received the necessary tax forms from the platform, he still needed to ensure all transactions were accurately recorded to avoid potential disputes with the IRS.

Steps and Tips for Successful Tax Reporting in the USA
How to Report Taxes on Cryptocurrency Transactions

Currently, the IRS classifies virtual currency as a type of asset, meaning the taxation process is similar to that of stocks. Taxes are reported on Form 8949 and Schedule D. Profits are taxed as capital gains, while losses can offset taxes, up to a maximum of $3,000 in active income tax.
A unique aspect of cryptocurrency is that some platforms require users to record the cost basis themselves, providing opportunities for some to underreport taxes by manipulating these figures. Therefore, it’s crucial to be meticulous in recording the cost basis. In the U.S., according to IRS regulations, capital gains tax rates on virtual currencies can vary from 0% to 37%, depending on an individual’s total income and holding period. This information is vital for investors considering long-term investment strategies.