The most important thing to remember is that you don’t pay anything until you sell assets for fiat or other digital assets. Otherwise, unrealized gains are not subjected to the attention of the IRS. You can use a wide range of cryptoanalysis tools and do whatever you want in the DeFi ecosystem, but as soon as you sell any digital assets, you have to pay whatever you earned on the operation.
Defining profitability is another issue. If you made a transaction on a decentralized exchange, the guidelines from the IRS may not apply to you. However, CEX platforms that abide by regulations have to report any income over $600. Individual users have to pay even for smaller amounts. Earning a single US dollar is enough to be subjected to the rules of the IRS.
The rate may vary between 0% and 37% depending on a variety of factors including the period of holding. The exact rate is quite hard to calculate correctly. Using a crypto tax calculator in 2024 seems like a good idea, but you still have to be precise when entering the data.
How to file crypto taxes 2024
The process is very short and requires making just 5 distinct moves. Note that the guide we are going to provide below is for the US. Canada has different rules and many EU countries use unique approaches while the Union is looking into the issue and trying to find a good solution. In many Asian countries, you have to pay up to 30% from your profits like in India.
The process of filing in the US is quite straightforward yet has some nuances:
1. Calculate gains and losses using any method you like. Software works well, but you can simply use the standard formula.
2. Fill gains and losses in the IRS form 8949. Make sure to fill in the correct information and double check your calculation beforehand.
3. The totals from the form must be included in the Schedule D (form 1040) which is specifically for operations on exchanges.
4. The income from activities in the unregulated digital market must be specified in the form 1040 under Schedule 1 or C.
5. Finish the return process by submitting the forms to the IRS using any preferred methods that you usually use to correspond with the authority.
How to calculate what you owe to uncle Sam
The form 1040 is the start of your journey. In the form, you will see a question related to receiving and selling digital assets. If you have such operations that happened during the last year, it is necessary to answer “yes”. Note that answering this question is not something that will affect the final rate or returns. However, if you lie and the IRS finds out, it will be considered a fraud!
Calculating gains and losses from financial activities
The first step is the most complicated as it requires you to keep track of all operations on all your wallets and exchanges. Each disposal should be accounted for. A disposal is a process of moving assets from your custody under any circumstances. Examples of this kind of operations include selling for fiat, swapping for other assets, buying something, and others.
Use the price of your assets during the disposal process and subtract any commissions and fees associated with the operation as well as the cost of the purchase/sum received in exchange. If the number is positive, it is a capital gain.
Here’s a simple example:
- You bought 1 $ETH at $2000.
- You later sell 1 $ETH for $2500.
- The fee for the operation was 0.5%.
- So, $2500 — $2000 — $125 = $375.
The last number is the capital gain. It is the simplest form of calculating what you must pay. However, there might be other factors to consider and tracking all operations is a hassle that highly specialized programs capable of calculating what you owe to the IRS are designed to do automatically by directly connecting to your wallets and exchange accounts. Note that you have to keep track of automated trades too. It means that running a cryptocurrency trading robot can generate gains and losses that are hard to account for.
Completing the 8949 Form from the IRS
This document is there for crypto tax reporting. Here, you must mention all disposals that happened during the last year. However, the length of the holding period affects the rate and must be specified in Part I (for holdings shorter than 12 months) or in Part II (for holdings longer than 12 months).
Since the Form 1099-B is no longer in active use by the IRS, you must tick the box “C” and start filling the information for each operation:
- The type of digital asset sold.
- The date of the acquisition.
- The date of the disposal.
- Proceeds from the sale in accordance with fair market value.
- The costs associated with the purchase.
- The result of your activities (gains or losses).
It is important to report both positive and negative operations so that gains can be offset by losses which is a good way to reduce the final payment.
Reporting totals from 8949 on Schedule D
The total (calculated by subtracting the sum of losses from the sum of gains) must be shown on Schedule D which is attached to the Form 1040. Note that this particular document is used for activities related to digital assets and nothing else. You must report other income separately whether you received them from real estates, trust funds, or businesses.
Filling in Schedules 1 or C
Any earnings of digital assets through any means such as mining, receiving payouts for staking, gaining interest, or as remittances must be reported in this document in accordance with the IRS rules and guidelines. To calculate the value of acquisitions, use the price of assets at the time of the transaction settlement.
Here are cryptocurrency tax tips in 2024 for filing income generated from handling your digital holdings:
1. Schedule 1 is for individuals receiving their digital assets through remittances, wages, forks, or airdrops under “other income”.
2. Schedule C is for business entities that receive payments in or mine coins, or get paid for various jobs and services.
What is the best crypto tax software?
Finding the right tool for the job is very important when it comes to paying what you owe to Uncle Sam. We strongly believe that it is important to have a framework allowing you to evaluate the quality of the service offered by a provider in this sector of the financial industry.
Here are things that are associated with top programs in this area:
- Precise transaction tracking. An application must be able to collect data from a variety of platforms including wallets, DEXs, and CEXs. According to the survey of the blockchain ecosystem conducted by CryptoTaxCalculators, 67% of all respondents from the cohort of individual retail investors are using multiple platforms for their activities.
- Fully automated processing. If you have to do a lot of the things manually after an app collects the data for you, it is still a lot of work and a fruitful field for mistakes. Submitting forms to the IRS can be a lengthy process that can be cut by at least 80% according to studies by industry experts.
- Abiding by regulations. It is important to work with companies that update their algorithms and make sure that their instruments comply with the latest regulations. It is especially important in the 2020s since the IRS has doubled its efforts to audit cases that involve digital assets.
- UX/UI is important. Over 60% of cryptocurrency holders do not describe them as tech-savvy and need assistance when setting up wallets and accounts on CEX platforms. The same number of users say that they like using services that are easy to navigate and can be understood intuitively.
- Security and anonymity. Protecting personal information is hugely important. Choose platforms that have reasonable safety measures in place and adhere to high privacy standards. Kaspersky Lab reported in 2023 that over the number of hacker attacks targeting this kind of software increased by at least 38% in just one year.
- Good customer support. Using sophisticated software that handles finances is a stress on its own. Barely understanding how it works and feeling lost when encountering an issue make the whole experience very unpleasant. It is important to work with companies that provide excellent customer care service and can quickly solve technical and other issues.
- Pricing. Average prices in the industry range from $49 to $299 annually depending on the billing period. The complexity of user’s operations also plays a role. Pick a service that delivers the most without stressing your budget too much.
Remember that all these factors must be considered when picking a software provider. Since many contemporary retail traders use advanced instruments like an AI bot for crypto trading or fractionalized staking on multiple platforms, it is hugely important to keep track of all operations regardless of their size. Using automated software is crucial for active retail traders in the US.
Top crypto tax software 2024
The selection of powerful applications in this sector of the blockchain ecosystem can feel overwhelming to a newcomer. However, there are some outstanding companies that offer products that are convenient to use, provide unique features, and allow you to quickly receive forms that can be immediately sent out to the IRS.
Blockpit
This provider was founded in 2017 and offers clients from EU some of the best crypto tax solutions in 2024. The service supports filing in Germany, the US, Austria, France, Spain, and many other EU nations. It is integrated with numerous platforms and has specialized products for NFTs, DeFi earnings, and more.
Here are some interesting features that may be useful to you:
- Separate reporting for different asset types.
- Direct importing of over 250 thousand different assets.
- Mobile applications for all types of smart devices.
- High-performance portfolio tracking tools.
You can check out the service using their free trial option. All features will be unlocked but reporting is a paid feature. The platform supports NFTs on nearly all blockchains and works with all popular DeFi protocols including those deployed on Ethereum, Polygon, Solana, Avalanche, and more.
Cointracker
This app works with 300 different CEXs and DEXs while handling over 8000 different cryptocurrencies that can be effortlessly exported for use in TurboTax and TaxAct (for US retail traders). All data is shareable if you want to receive additional consultations from experienced professionals who you trust. The pricing is flexible with final quotes depending on the number of transactions that must be processed.
Cool features of Cointracker:
- Can be directly connected to multiple e-filing systems including TurboTax and Wolters Kluwer CCH.
- Supports a variety of countries including India, US, UK, Canada, and Australia.
- Has multiple tiers for paying customers allowing you to choose which one works for you.
The free tier allows users to generate summaries, see calculated portfolio values, and report manually if they want to.
TaxBit
If you want something easy-to-use and 100% free, this particular service is something you will appreciate. It was founded in 2018 for users who struggled to self-report. TaxBit works with a variety of CEX platforms and can be used for manual import of on-chain data from several wallets. Since the platform is free, it does not offer any customer care services.
Here are interesting things about TaxBit:
- You can manually connect to several wallets and extract information.
- The app is completely free allowing people who are willing to spend time do everything without stressing their budgets.
- It can be quite challenging to navigate the interface as it is not designed to please everyone.
The service is designed to work well for US retail traders, but features are useful to people from all over the world and the app is available globally.
TokenTax
It is a service for the North American market and manages to attract users thanks to its convenient interface and direct connection to Coinbase which is the most popular CEX platform in the US and Canada. TokenTax is directly compatible with multiple frameworks and allows for quick export and import of data for manual reporting.
Here are great features of this app:
- An excellently designed UI allowing for convenient use.
- It can automatically harvest the data on gains and losses.
- The basic plan is for Coinbase only.
The service is designed for people from all over the world and allows retail traders to quickly gather and process information from CEXs.
Koinly
It is one of the Best tools for crypto tax in 2024 thanks to a long list of supported countries and an excellent UI that simplifies everything for inexperienced users. The free version allows you to process up to 10 thousand transactions and generate reports for 34 different countries. The app works with 20 thousand different digital assets, multiple international CEXs, software wallets, and blockchain networks while offering US users compatible files for TurboTax and TaxAct.
Here are useful features of Koinly:
- Generate exportable files for similar services from TradFi.
- Import information from blockchains and wallets.
- You can make reports for over 34 national juridical frameworks.
If you are interested in a service that offers a flexible approach allowing you to form generic reports for over 30 countries, Koinly is a great choice with low prices and excellent UX/UI.
Why do you need to use these apps?
It is extremely hard for contemporary retail traders to keep track of all their operations. For example, running a simple crypto grid trading system can result in hundreds of transactions each month. Gathering the data, calculating gains/losses, and forming reports manually is a Herculean task that many individuals will never be able to complete while abiding by overly complicated rules and regulations.
We strongly recommend all retail traders who want to trade legally and without any questions from authorities to use specialized apps designed to save you from this particular type of headache!