Since the inception of Bitcoin in 2009, the financial world has been observing the digital revolution unfold. In this era of digital currencies, or cryptocurrencies, Bitcoin, Ethereum, and numerous other altcoins have made their way into investment portfolios, sparking a new gold rush in the digital age. Yet, as these digital assets gain prominence, tax authorities globally, including the U.S. Internal Revenue Service (IRS), have begun to stake their claim.
In the U.S., the IRS has decided to treat cryptocurrencies not as currencies, but as property. Consequently, every transaction involving cryptocurrencies — whether it’s buying a cup of coffee, selling an altcoin, or being paid in Bitcoin — may have tax implications. To stay on the right side of the law, it’s vital to accurately report these transactions.
This guide will explore how TurboTax, one of the most popular tax preparation software, can streamline the process of reporting your cryptocurrency transactions, turning a potentially daunting task into a smooth sail.
Cryptocurrency: A Property in the Eyes of the IRS
In contrast to the usual perception of cryptocurrencies as digital ‘currencies,’ the IRS begs to differ. Cryptocurrencies are regarded as property for tax purposes. This indicates that capital gains tax laws apply to any profit or loss resulting from the sale or exchange of your cryptocurrency. Even if you receive payment in cryptocurrencies for goods or services, this law still holds true.
What Triggers a Taxable Event?
While the IRS has its eyes set on your cryptocurrency transactions, it doesn’t consider every transaction taxable. Here’s what typically makes the taxman take note:
- When you exchange cryptocurrency for traditional money (like US dollars);
- When you trade one cryptocurrency for another;
- When you mine cryptocurrency;
- When you receive cryptocurrency as payment.
However, the following scenarios generally don’t ring the IRS’s bell:
- When you buy cryptocurrency using traditional money;
- When you donate cryptocurrency to a non-profit organization;
- When you gift cryptocurrency, as long as it’s within specific limits.
Cryptocurrency Tax Reporting: The IRS Way
For tax reporting, the IRS requires you to detail your cryptocurrency transactions on Form 8949. The summarized results from this form are then transferred to Schedule D. If you’re paid in cryptocurrency, it’s reported on Schedule 1, Line 8.
In the next sections, we’ll discuss how to use TurboTax to navigate these forms and streamline your cryptocurrency tax reporting process.
TurboTax and Cryptocurrency: A Step-by-Step Guide
TurboTax has adapted to the evolving financial landscape by offering a straightforward method to report your cryptocurrency transactions. Depending on the version you’re using (Online or CD/Download), the process will differ slightly.
TurboTax Online
- Initiate the Process: Sign in to your TurboTax account. In the left menu, select “Federal,” followed by “Income & Expenses”;
- Navigate to Cryptocurrency: Scroll until you find the “Cryptocurrency” option. Click “Start” or “Revisit”;
- Input Your Transactions: You’ll be guided to add all your cryptocurrency transactions for the year. Make sure to detail each transaction, including the date, the type of cryptocurrency, and the amount spent or received.
TurboTax CD/Download
- Begin Your Tax Return: Open TurboTax and start your tax return process;
- Locate the Cryptocurrency Section: From the main screen, click on “Income” from the top menu. Then select “Investment Income,” followed by “Stocks, Mutual Funds, Bonds, Other”;
- Choose Cryptocurrency: In the section “Tell Us More About Your Investments,” select “Cryptocurrency”;
- Enter Your Transactions: Similar to the online version, you’ll be prompted to input all your cryptocurrency transactions.
Leveraging TurboTax’s Cryptocurrency Import Feature
Manually entering every transaction can be tedious, especially for heavy traders. TurboTax offers a feature to import all your transactions from a .csv file, simplifying the process significantly.
TurboTax Online
- Go to the Cryptocurrency Section: Like before, navigate to “Federal” > “Income & Expenses” > “Cryptocurrency”;
- Import Your Transactions: Instead of manually entering transactions, select “Add Cryptocurrency Data” and import your .csv file;
- Verify Your Transactions: After importing, review the transactions to ensure they match your records.
TurboTax CD/Download
- Find the Cryptocurrency Section: Navigate to “Income” > “Investment Income” > “Stocks, Mutual Funds, Bonds, Other”;
- Import Your Transactions: In the “Cryptocurrency” section, select “Import from .csv file” instead of manually entering transactions;
- Review Your Transactions: Double-check the imported transactions before proceeding.
Augmenting TurboTax with Cryptocurrency Tax Software
Given the complexity of tracking every transaction, especially for those heavily involved in trading or mining, pairing TurboTax with a dedicated cryptocurrency tax software can be a beneficial strategy. Tools such as CoinTracker or CryptoTrader.Tax can compile your transactions across different exchanges, generate a consolidated report, and prepare a Form 8949 ready for import into TurboTax.
In the next sections, we’ll tackle some common challenges in cryptocurrency tax reporting and offer solutions to help you overcome them.
Troubleshooting Common Challenges
Filing cryptocurrency taxes can sometimes be a labyrinthine task, especially when faced with missing transaction records, forks, airdrops, or losses. Here’s how to handle these hurdles:
Missing or Incomplete Records
The IRS expects taxpayers to keep a detailed record of all their cryptocurrency transactions. If your records are missing or incomplete:
- Identify the Platforms Used: Compile a list of every cryptocurrency exchange or wallet you’ve used. This list might include Coinbase, Binance, Kraken, Exodus, or MyEtherWallet, among others;
- Reach Out to Providers: Contact each platform or wallet provider via their customer support channels, usually email or a support ticket system. Ask for help retrieving your transaction history;
- Provide Relevant Information: To expedite the retrieval process, provide as much information as you can, such as your account username, the associated email address, and any known transaction identifiers.
Forks and Airdrops
Cryptocurrency forks and airdrops can be challenging to report. As of my knowledge cutoff in September 2021, the IRS considers these events taxable, but it’s essential to stay updated:
- Forks: A fork happens when a blockchain splits into two separate chains, creating a new cryptocurrency. This may happen due to disagreements within the community, protocol upgrades, or developers’ intentions;
- Airdrops: Airdrops are the free distribution of cryptocurrency tokens or coins to holders of a particular cryptocurrency. Often used to promote a new project or reward users, these distributions can sometimes come as a surprise;
- Tax Implications: The IRS treats both airdrops and hard forks as taxable events. If you receive new cryptocurrency tokens from a hard fork or airdrop, the fair market value of the tokens at the time of receipt is taxable income.
Dealing with Losses
Selling cryptocurrency at a loss can be disheartening, but there is a silver lining. You can use these losses to offset other capital gains or up to $3,000 of your ordinary income. Here’s how to handle losses for tax purposes:
- Identify Your Losses: A loss occurs when you sell a cryptocurrency for less than its original purchase price;
- Understand Capital Gains and Losses: Cryptocurrency is treated as property, and gains or losses from their sale or exchange are categorized as capital gains or losses;
- Offsetting Gains: You can use capital losses to offset capital gains from other investments or the sale of assets, potentially reducing or eliminating the associated tax liability.
Conclusion
Cryptocurrency is more than a fad — it’s becoming integral to our financial systems. As this integration deepens, it’s crucial to understand and meet your associated tax obligations. TurboTax offers an efficient way to handle your cryptocurrency taxes and ensure IRS compliance.
Remember, while this guide offers a basic overview, the world of cryptocurrency taxation is intricate and constantly evolving. If you have substantial cryptocurrency transactions or unique situations, consider consulting with a tax professional. With the right resources and knowledge, you can ride the wave of cryptocurrency taxation with ease and confidence.