For many new crypto investors, the thought of having to sort out your taxes is a daunting prospect. As complicated as it can be for business owners and self-employed individuals, things get even more tricky when it comes to regular investors, let alone those that dabble in the crypto ecosystem.
Right now, TurboTax is probably the easiest online tax-filing software to use. The company has made it relatively simple for you to file your taxes on any cryptocurrency investments that you made. Depending on which crypto exchange you use, the process could be as simple as making a few mouse clicks.
Reporting crypto investments on taxes
If you think you don’t need to report any crypto investments you’ve made, you’re wrong. The IRS has made it compulsory to file your cryptocurrency income as part of your taxes. Failing to do so would be considered fraud. Many top cryptocurrency exchanges report your crypto activity to the IRS if you meet certain criteria.
Crypto taxes are based on an old 2014 IRS ruling that decided cryptocurrencies should be seen as a type of capital asset, like a stock or bond, rather than a currency. Capital assets are taxed whenever they are sold for a profit. This also applies if you use your crypto to buy something, like groceries. By converting bitcoin into anything else, except another cryptocurrency, you need to be taxed at that point.
The good news is that if you invest in crypto and end up losing money, you don’t owe any taxes. Like most investments, you only pay taxes on capital gains, not capital losses. Also, if you’ve held crypto for less than a year before selling it, any profits would be filed under short-term capital gains and taxed at a normal income tax rate. If you held crypto for over a year, it would be filed under long-term capital gains, which have lower tax rates.
In other cases, you need to include your crypto in your taxes. If you mine cryptocurrencies, you’ll also need to file taxes on the amount of crypt you’ve mined. Even if you received crypto as a gift from someone (or as an airdrop), it counts as taxable income as well. The same holds true if you get in crypto for goods or services you provide.
How to report crypto on TurboTax
If you use Coinbase, you can let the exchange automatically calculate your total gains and losses, which you can input into TurboTax. However, Coinbase also lets you use other third-party services, like CoinTracker, to do the job if you wish. Besides that, you have other crypto tax providers that automate the entire process as well. All you have to do is upload your data when prompted by your tax filing software.
Calculating your taxes manually becomes a complicated endeavor, especially since many crypto traders don’t keep detailed records of exactly how much they sold and for how much. Capital gains on crypto are reported on IRS Form 8949.
When using TurboTax, it will ask you to select which cryptocurrency service you use. Besides CoinTracker, Coinbase and Robinhood are options as well. Some options, like Binance, aren’t present, so you still might have to do some manual data inputting as well.