This article will cover how to complete IRS form 8949 to report your cryptocurrency transactions and determine your taxable totals. Please be sure to read our more complete article covering the basics of cryptocurrency taxes. Pay particular attention to the income thresholds for determining long-term capital gains tax rates. US taxpayers filing as single with 2017 total adjusted gross income (AGI) below $37,950 will not owe tax on long-term cryptocurrency gains; for those married filing jointly, the threshold is $75,900. Note these don’t apply to short-term gains. That tax article also lists tax brackets for short-term and long-term gains.

If you don’t need to report your transactions because you fall below the income thresholds, congratulations. Keep in mind the record-keeping suggestions in our other articles in case you need to pay gains taxes in future years. For the rest of you, read on.

Please keep in mind that this article is not meant to be tax advice. Rather, these are general guidelines with specific hypothetical examples to help investors complete IRS Form 8949 to report crypto to US dollar gains taxes. Readers should determine their own tax situations and consult an expert if needed. Schedule D will be covered in a separate post Sunday April 1.

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What crypto tax records are needed?

In order to determine your taxable capital gains, you must first create a list of all of your crypto transactions for the calendar year. You can do this in many different ways. For those who are not frequent traders, you can use a simple spreadsheet, online tracking tools or even a paper ledger. For each purchase using US dollars, record the date, total number of coins purchased, the total cost including fees and commissions, and the average price per coin for that purchase. That last data point may be needed if you later decide to sell only a portion of the coins bought on that date. Record-keeping for more frequent crypto traders will follow the same general principles but of course will be more extensive depending on trade frequencies and volumes. Online tracking tools such as CoinTracking or Bitcoin.tax will be of great benefit to frequent traders.

It’s easy enough to report coins that trade directly in USD. Bitcoin (BTC), litecoin (LTC), Ethereum (ETH), Ripple (XRP) and bitcoin cash (BCH) can be bought and sold for USD on various exchanges. Exchange transaction reports showing your costs for purchases and proceeds for sales can be generated and downloaded using exchange reporting tools. Remember to add any trading fees to your costs and deduct fees from proceeds of sales to avoid overpaying taxes. While a few exchanges do issue 1099’s for some accounts, at this time there aren’t consistent regulations or policies. Some exchange reports can be imported directly into common tax preparation software packages, but you should always review the transactions to screen for mistakes that could cause you to underpay or overpay taxes.

Reporting cryptocurrency gains using form 8949

Figure 2 shows a limited portion of the first page of IRS form 8949 Sales and Disposition of other Assets. Keep in mind that the form title tells you what you need to report: Sales. The only event that becomes reportable is a sale. Part I of the form is used to list transactions for investments you’ve held for less than a year. Part II for assets held long term is identical.

As you can see from form 8949, you will need to report what you are selling (0.5 bitcoin for example,) date of purchase, date of sale, net proceeds from sale (be sure to subtract transfer and trade fees) and total original cost (be sure to include transfer and trading fees.) Column (h) is of course the net gain or loss from sale proceeds less purchase costs. You record each short-term trade in this fashion on Part I (fig 2). When reporting the dollar amounts of each trade, be sure to take into consideration any purchase fees or sales fees in the totals. Network transfer fees can also be taken out of the net proceeds of a sale.

For example, let’s say you bought 0.5 BTC on July 16, 2017 when BTC dropped in value. You were lucky enough to have bought at the daily low of $1917.02 (per CMC chart.) You spent $958.51 at the trading price, but you also were charged a 1.5% fee of $14.38 and 25 basis points over the BTC trading price for an additional $2.40. When you sell that 0.5 BTC, your cost basis is $975.29. At the time of sale, you were likely charged a fee. Be sure to list net proceeds of the sale after all fees. This is the IRS standard method for reporting the taxable amount of each sale. Note that you don’t list fees separately, they are included in the transaction. This is how you “deduct” the fees. You cannot list them elsewhere, as that would result in double-dipping to get two tax breaks from the same fees.

When you sold this 0.5 BTC on December 17, 2017, BTC was trading at $19,994.00 (from CMC Charts.) Your gross amount received was $9,997.00, but a fee of $149 was deducted, so your net proceeds from the sale were $9848.00. This is a short-term trade since the BTC was held less than one year. Listing that trade in section 1 on form 8949 would therefore look like this:

Note that box C is checked since most investors aren’t receiving 1099’s from crypto exchanges. You continue to list all sales of short-term holdings in part 1 and long-term sales in part 2. Each part has a separate total box at the bottom of the section. If you have more trades than space allows, you can fill out as many 8949 pages as needed. Just make sure the totals on the first page include all of the transactions.

Wallet transfers and network fees

What about network fees, wallet transfers and miscellaneous expenses? Wallet transfers and network fees are usually charged in the underlying native currency. For example, you may have moved your 0.5 bitcoin from the exchange to your Ledger Nano S purchase. A network fee was deducted from your bitcoin, reducing the total you own. Transferring the bitcoin back to the exchange resulted in another small fee as well. Once you were ready to sell, you actually had less than 0.5 bitcoin. Instead, perhaps you ended up selling 0.48 bitcoin, resulting in slightly lower proceeds than you would have gotten if the full 0.5 bitcoin had remained. This results in a tax break already priced in. The 0.02 bitcoin was deducted from your total before sale. You are only taxed on the 0.48 BTC sold.

It is important to remember that transferring a currency between exchanges or into and out of private wallets does not trigger a taxable trade. Reporting is only required when exchanging one asset for a different asset or for USD. Coinbase and other exchanges sometimes report currency withdrawals as sales, but they really aren’t. It is done this way because the exchange has no way of determining what happened with any coins transferred out of their exchange. It is left up to the investor to keep records of all trades to determine reporting requirements.

What about multiple buys or partial sales?

What if you bought bitcoin several times in 2017 and then sold it all before December 31? Each sale is considered as a separate transaction for tax reporting. If you bought a total of 0.5 BTC with several small purchases and then sold the total amount in a single trade, you would list that as one transaction. The date acquired can be listed as “various” and the cost basis is the net total of all of the buys after fees are taken out. It is the sale that determines how to report for taxes, not the purchases.

On the other hand, what if you bought 0.5 BTC and decided to sell a portion to lock in gains while keeping the rest? Well, you simply list the sale transaction as above using the portion of BTC sold. Let’s assume you sold 0.25 BTC. Using our first example, the cost basis is $488 (rounded.) You would list the trade as 0.25 bitcoin sold with date of sale (12/17/17), date of purchase (7/16/17), net proceeds ($4924) less original cost ($488) leaving a taxable gain of $4436 in column (h).

How do I handle multiple crypto trades?

Things get a little more complicated if you bought and sold multiple times throughout the tax year. The basic principles are the same though. Each sale is reported along with the cost basis of the specific coins you are selling. The final boxes in Part I and II of 8949 are for totaling up all of the short-term and long-term gains and losses. Trades resulting in losses are reported the same as gains, and the resultant loss is subtracted from the gains in column (h).

The IRS and most exchanges automatically assume that you are choosing the sell the first coins purchased each time, rolling that forward into the next coins as needed to total up to the amount of sale. That’s the First In First Out accounting method, or FIFO. You can also choose to use the Selected Lots (SL) or the Last In First Out (LIFO) method. Each has advantages and drawbacks. In general, using SL allows you the greatest flexibility and control over your tax burden. You can choose to sell your highest cost basis coins first in order to minimize taxable gains, but you always need to check whether this forces the gains into the short-term category versus the lower taxes from long-term gains. You can read a little more about this in our full 2017 tax article.

Schedule D and crypto to crypto trade examples up next

Hopefully this article provided at least a few tips to help with last-minute tax preparation. Be sure to take a look at our tax discussion thread if you need more examples or have more tax questions. We can’t give specific advice, but we may be able to point you to other resources for questions we didn’t cover.

Our follow up guide to IRS Schedule D is now posted.

Our crypto to crypto tax article is now posted.