Become a better investor
Lesson in Course: Crypto (beginner, 7min )
Do we need to pay taxes if we make money investing in crypto?
Just like trading stocks, the IRS expects us to pay taxes on any gains from crypto. However, tax reporting standardization is only just starting to be defined, and it falls on us to stay organized when filing our taxes.
The decentralized nature of crypto makes tracking costs difficult for the government and us—especially if we acquired coins through a DEX or other CEXs. If we use multiple exchanges, we must track every transaction and report the income on our taxes at the end of the year.
If we stick to using one centralized exchange, that exchange will have all of our transactions. We can use CoinTracker or TurboTax to file our taxes and report the income at the end of the year.
Crypto investing is still a bit like the wild west, and each exchange will report transactions slightly differently. Let's get familiar with the different docs so we know what to expect before making any trades.
Brokers and barter exchanges typically use form 1099-B to report gains on capital assets sold or exchanged on behalf of clients.
This form lists out every transaction, including taxable gains, and is the easiest to calculate the taxes we owe. However, due to the challenges of tracking costs across different exchanges, not all of them report a 1099-B.
A 1099-K tax form reports the total value of crypto that we traded on an exchange for the year.
The amount reported on a 1099-K is not our capital gains but a notification to the IRS that we traded crypto and the expectations of taxable trading income or losses for the year. We should expect to receive a 1099-K if we made 200 or more transactions, the volume of which equals $20,000 or more.
We use Form 1099-MISC to report miscellaneous income to the IRS.
Some crypto exchanges, most notably Coinbase, have begun to use the 1099-MISC form to report traders' gross income from crypto rewards or staking. Like the 1099-K, Form 1099-MISC lets the IRS know we've been trading crypto, expecting us to report taxable gains or losses for the year.
To simplify our taxes, consider using only one CEX, or use a brokerage like Robinhood. Once we are more experienced or want to use DEXs for more complicated investments, we can set up CoinTracker for our taxes.
The worst thing we can do is evade taxes. It's illegal and will catch up to us whether we did it intentionally or not.