Depending on what country you live in, your cryptocurrency will be subject to slightly different tax rules. The questions below address implications within the United States, but similar issues arise around the world.
CryptoTrader.Tax is the official tax partner of 3Commas.io
1. How do cryptocurrency taxes work?
As per IRS guidance, cryptocurrencies like bitcoin are treated as a form of property for tax purposes—not as currency. Just like other forms of property like stocks, bonds, real-estate, etc., you incur capital gains and capital losses when selling, trading, or disposing of your cryptocurrency. These gains and losses need to be reported on your tax return.
For example, if you purchased 0.1 Bitcoin for $1,000 in April of 2018 and then sold it or traded it two months later for $2,000, you have a $1,000 capital gain. You report this gain on your tax return, and depending on what tax bracket you fall under, you will pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain. This applies for all cryptocurrencies.
2. Do I need to report my cryptocurrency trades on my taxes?
If your trade resulted in a taxable event, yes. Similar to trading stocks, cryptocurrency trading results in capital gains or losses income which need to be reported. Whenever you trigger a ‘taxable event’, you must recognize any capital gains or losses on the sale.
3. What is a taxable event?
A taxable event is simply a specific action that triggers a tax reporting liability. In other words, whenever one of these 'taxable events' happens, you trigger a capital gain or capital loss that needs to be reported on your tax return.
The following have been taken from the official IRS guidance from 2014 as to what is considered a taxable event in the world of crypto. If any of the below scenarios apply to you, you have a tax reporting requirement.
- Trading cryptocurrency to fiat currency like the U.S. dollar is a taxable event.
- Trading cryptocurrency to cryptocurrency is a taxable event (you have to calculate the fair market value in USD at the time of the trade).
- Using cryptocurrency for goods and services is a taxable event (again, you have to calculate the fair market value in USD at the time of the trade).
4. Are crypto-crypto trades taxable events?
Yes. As mentioned above, trading one cryptocurrency for another is treated as a sale of the first coin and a buy of the second. This means you need to report the associated gain or loss from the sale of the first coin on your taxes.
5. How do I report my cryptocurrency gains and losses on my taxes?
You need to complete IRS Form 8949 detailing your cryptocurrency taxable events and include this with your tax return.
On Form 8949, list all cryptocurrency trades and sells along with the date you acquired the crypto, the date sold or traded, your proceeds (Fair Market Value), your cost basis, and your gain or loss. Once you have each trade listed, total them up at the bottom, and transfer this amount to your 1040 Schedule D. Include both of these forms with your yearly tax return.
Specific cryptocurrency tax software can automatically build these tax reports for you. Historical prices, dates, and fair market values for all of your trades and transactions will be retrieved automatically by the software.
6. If I lost money and have capital losses, can those be written off to reduce my tax liability?
Yes! Just like if you were to lose money when trading stocks, capital losses from your cryptocurrency transactions deduct from your capital gains and income. In effect, they reduce your taxable income and put money back in your pocket!
7. How can 3Commas users automatically generate their necessary cryptocurrency tax forms?
3Commas users can leverage the CryptoTrader.Tax platform to generate all of their needed crypto tax forms. CryptoTrader.Tax is the leading tax reporting software for crypto investors and traders. Simply import your historical transactions from all of your exchanges into the platform and generate your tax reports with the click of a button. The software automatically retrieves prices in USD (or whatever your home fiat currency is) for all of your trades, so no manual work is required on your end.
Once you have generated your tax reports on CryptoTrader.Tax, you can import them directly into your preferred tax filing software like TurboTax, or give them to your accountant.