For the fourth year, federal tax forms ask you about Bitcoin and other cryptocurrency activities. The Yes or No question that’s been appearing at the top of Form 1040 has gotten even more specific for the 2022 tax year. It reads, “At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
What do you do if you check the Yes box? How do you enter these transactions as you prepare your income tax return? We have answers to these questions and more.
What Is Cryptocurrency?
Let's first make sure we're on the same page when it comes to crypto tax prep. This is how the IRS classifies cryptocurrency: It’s a digital currency or a "digital representation of value." You can't see it, hold it in your hand, or put it in your wallet. It's been in use for over a decade and has grown in popularity over the last few years. Instead of using a bank to create, transfer, and exchange funds, cryptocurrency employs a distributed and encrypted blockchain network to process transactions. No bank or government authority controls it, as they do with traditional currencies.
Cryptocurrency units are called coins, even though there's no physical coin. You store coins in a digital wallet or use an exchange or brokerage. A few of the major exchange and brokerage providers are Binance, Coinbase, Kraken, and eToro.
Bitcoin was the first cryptocurrency—we have a guide on how to buy, sell, and manage it—and it remains the most popular. It's been joined by Ethereum, Litecoin, and Dogecoin, among others. Cryptocurrency can be used to pay for goods or services, as an investment, or simply to exchange funds with someone else, whether for different cryptocurrencies or traditional currency. Transactions are recorded in an anonymized blockchain, which can be thought of as a digitized public ledger.
For the purpose of your taxes, the dollar value of the cryptocurrency at the time of the transaction is treated as either 1099 income or, in the case of you receiving it as payment from an employer, W-2 income.
The mechanics of using cryptocurrency are often as simple as scanning a QR code or copying and pasting a long ID. What happens in the background, however, is far more involved than your typical bank transaction since the transaction has to be verified by many distributed servers rather than one bank or exchange.
Cryptocurrency Is Property, According to the IRS
If you're a US taxpayer and have been using cryptocurrency but not paying taxes on any gains from it, you're not alone. You're also not compliant with IRS regulations, which could catch up to you someday. The agency may penalize you unless you can prove "reasonable cause."
Since 2014, the IRS has considered cryptocurrency to be property. Taxpayers are required to report transactions involving virtual currency as US dollars on their tax returns, which means they must determine its fair market value as of the transaction date. You can determine fair market value by converting the virtual currency into US dollars or into another currency that can then be converted into US dollars (assuming the currency's exchange rate is established by market supply and demand).
In other words, you need to do some seriously precise bookkeeping if you plan to use cryptocurrency. You can use some general accounting applications like Intuit QuickBooks Online, along with integrated apps or some extra data entry. A good bit of advice is to start keeping detailed records of all your crypto transactions from the start since reconstructing years of transactions could be difficult or even impossible.
Does this mean you could be on the hook for transactions going back to 2014? Yes. In fact, the IRS has sent letters to taxpayers who've been involved in cryptocurrency transactions, informing them that they had to file amended returns and pay back taxes.
Capital Assets vs. Ordinary Income
If you sell your home because you're moving or sell stocks because you want to cash in a profit, those properties are considered capital assets. Virtual currencies are similar. When you sell them and make a profit, you pay capital gains taxes on them, either short-term (held less than a year and taxed as normal income) or long-term (on Schedule D).
These amounts are calculated just like other capital gains and losses. You take your cost basis (the amount you paid for the currency) and calculate how much it's gone up or down since that date. Capital gains rates for the 2022 tax year can be 0%, 15%, or 20%, depending on your taxable income.
If you're selling property as a part of a business or trade, however, the property is not considered a capital asset and is taxed as ordinary income. The same rule applies to virtual currency sales. The IRS looks at the "character" of the gain or loss—your intent, or why you're selling.
The IRS's FAQs on Virtual Currency Transactions offer some clear answers to the most common questions. You can also read the denser IRS Notice 2014-21.
Reporting Cryptocurrency Using TurboTax and H&R Block
There is dedicated cryptocurrency tax software available (we haven’t tested them), but you can do crypto tax prep using online personal tax services.
TurboTax and H&R Block are the only two tax preparation services that walk you through the process of recording a cryptocurrency sale. TurboTax's Q&A in this area is thorough and offers plenty of guidance. You can report cryptocurrency transactions using any other online tax prep service, but they aren't designed to help you with it the way TurboTax and H&R Block are (TurboTax is stronger in this area).
With TurboTax, you have to spring for TurboTax Premier ($89 for federal filing) or TurboTax Self-Employed ($119 federal) to get help with Bitcoin taxes and altcoin taxes. The Deluxe version ($59 federal) doesn't include it.
TurboTax's cryptocurrency mini wizard is located in the Your Income section, under Investments and Savings (1099-B, 1099-INT, 1099-DIV, 1099-K, Crypto). There are several common situations that would require you to complete this section. You'd do it if you:
- Received crypto as payment for goods or services
- Sold, exchanged, spent, or converted it
- Received it as income, then held and sold it for profit
- Received it as a gift (only taxed when you sell, exchange, or dispose of it)
- Received new crypto from an AirDrop
Cryptocurrency transactions are sometimes reported on Form 1099-B, Form 1099-K, Form W-2 or Schedule C (earned income, just like cash), or a tax statement that your exchange sends you. Exchanges are not required to send these forms out, so don't be surprised if you don't have one from 2022. It's your responsibility to keep track of your transactions.
If you haven't kept records, look for an option in your crypto exchange account to download your order or trading history as a CSV file. If you're a frequent trader, make sure to download your history periodically throughout the year, since your exchange may limit you to three months of data, for example.
TurboTax lets you import transactions from 30 financial services, including Coinbase and Robinhood. The site either walks you through the process or tells you when forms will be available. We tested tax websites in February, before all the forms were finalized and therefore can't vouch for how smooth the process will be for you. You can always upload a CSV file from your computer if you're unable to import a form directly from your exchange house. There are multiple ways to do this depending on your situation, and TurboTax's help files explain it.
You always have the option to manually enter as many transactions as you need. If you have a lot of them, you’ll save time by using a transaction aggregator like CoinTracker. TurboTax needs the service name and payer's EIN (if you have a 1099-B). It now uses the same page you'd use to report the sale of any investment type. You need to supply the following:
- Investment type
- How and when you acquired it
- Description
- Date it was sold or disposed of
- Sale proceeds
- Cost basis
After you enter the data and click Continue, a summary of the transaction appears. You can either add more transactions or continue with the return if you're finished. A final summary tells you whether it was a short-term or long-term gain or loss and what that gain or loss was.
TurboTax users who are due a refund can have those funds deposited in a Coinbase account, where they can be converted into cryptocurrency.
H&R Block is the only other personal tax website that includes specific tools and walk-throughs for reporting cryptocurrency transactions on your tax return. Only the Premium (currently $69 for federal) and Self-Employed ($89 at this writing) versions support it. Both versions are expected to increase in price later in the tax season.
Since last year, H&R Block has enhanced its crypto tools. The site recommends manual entry for fewer than ten transactions but allows you to just report totals if your crypto transactions are available on Form 8949 or on your Gain/Loss Report. You enter the details of the sale similar to how you'd do it in TurboTax, though you can now continue to add transactions on the same page. Starting with the 2022 tax season, you can import transactions through CoinTracker.
How Do Other Tax Apps Deal With Cryptocurrency Taxes?
You can use any tax app to report cryptocurrency transactions, but you won't get much help with it, which is why I recommend using TurboTax or H&R Block—or a certified tax professional. If you report cryptocurrency transactions using another app, you have to calculate the fair market value of the cryptocurrency in US dollars for your tax return. You enter any income from cryptocurrency as you would any other similar item on your return.
Some sites do offer brief help topics on crypto tax prep, but that's about it. FreeTaxUSA is the best among such services. It has a good help article on the topic that identifies the different IRS forms where transactions will be entered based on how you received the cryptocurrency (like investment, mining, and wages). It also has a series of excellent, clearly written FAQs.
Do You Need a Pro for Crypto Tax Prep?
You can give virtual currency as a gift, transfer it between wallets or exchanges, and purchase it with US dollars without creating a taxable situation. But if you have numerous taxable events under your belt or need to catch up from past years, you may need to consult a professional, preferably a CPA, who specializes in virtual currency tax issues.