The IRS designates cryptocurrencies and other similar virtual assets as property and as such are subject to capital gains tax when certain taxable events occur. These events include converting cryptocurrency into fiat currency (USD), as well as converting one cryptocurrency into another, such as converting Bitcoin (BTC) into Ethereum (ETH). However, the initial purchase of a cryptocurrency is not considered a taxable event. Sending cryptocurrencies from an exchange to a software or hardware wallet, or from one wallet to another is also not considered a taxable event and does not need to be reported.
To better explain which events are taxable and which are not, let us use a conversion from BTC to ETH as an example:
- You purchase 0.1 BTC for $100 (Not Taxable)
- You send your BTC to a crypto exchange (Not Taxable)
- You convert BTC into 0.5 ETH (Taxable)
- You sell your 0.5 ETH for $200 (Taxable)
If you received, sold, sent, exchanged, or acquired any form of virtual currency during the tax year, you will need to signify this on your tax return for informational purposes. To do this within the program, please go to:
- Basic Information
- Personal Information
- Additional Personal Information
- Check the box entitled, "___________ received, sold, exchanged, or otherwise acquired financial interest in virtual currency during the current tax year."
What information do I need to report for my crypto conversions/sales?
Similar to the sale of stocks and other securities, you will require certain information to properly report your crypto conversions on your return. This information includes the date you acquired your crypto, the cost basis, the date you converted your crypto asset(s), and the proceeds from the conversion (i.e. the value of your crypto prior to converting it). All of this information will also be necessary if you sold your crypto currency for USD.
To report your sales and conversions within the program, please go to:
- Capital Gains and Losses
- Capital Gain and Loss Items
You may not be issued a form 1099-B reporting your sales depending on the exchange that you used to buy/sell your crypto. Two of the biggest crypto exchanges in the United States are Coinbase and Binance; neither of these exchanges currently issue 1099-B forms to their users. If this is the case, it is important to make sure that you keep track of your crypto transactions.
For more information, please visit the IRS official FAQ, here.