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How to report digital asset income

If a digital asset transaction results in taxable gain or loss, you must report all income from your digital asset transactions. Follow these steps:

Keep records

If you had digital asset transactions, keep records that document:

  • Your purchase, receipt, sale, exchange or any other disposition of the digital assets
  • The fair market value as measured in U.S. dollars of all digital assets received as income or as a payment in the ordinary course of a trade or business

The Internal Revenue Code and regulations require taxpayers to maintain sufficient records to establish the positions taken on federal income tax returns.

Calculate your capital gain or loss

To calculate the capital gain or loss of a digital asset that you disposed of in a taxable transaction, you’ll need this information:

  • Type of digital asset
  • Date and time of transaction
  • Number of units
  • Fair market value at time of transaction (as measured in U.S. dollars)
  • Basis of digital asset sold

How to determine if your capital gain or loss is short-term or long-term

The period when you hold the digital asset (the holding period) begins on the day after you acquired the digital asset and ends on the day you sell or exchange it.

  • Short-term capital gain – If you held the digital asset as a capital asset for one year or less before selling, exchanging, or otherwise disposing of the digital asset.
  • Long-term capital gain – If you held the digital asset as a capital asset for more than one year before selling, exchanging, or otherwise disposing of it.

Find details on short-term and long-term capital gains and losses in  IRS Publication 544.

Determine your basis

The basis of property is the cost of it. Generally, the basis of a digital asset is the cost in U.S. dollars plus any allocated transaction costs when you purchased or exchanged it.

How you determine your basis for digital assets depends on the type of transaction you had.

To determine your basis, you’ll need this information:

  • Type of digital asset you acquired (for example bitcoin)
  • Date and time you acquired the digital asset
  • Number of units of the digital asset acquired
  • Fair market value of the digital asset when acquired (as measured in U.S. Dollars)

Find details on basis in IRS Publication 551.

Report digital asset income on the right form

The form you use depends on the type of transaction:

If you sold, exchanged or otherwise disposed of a digital asset you held as a capital asset

Use Form 8949 to report your capital gain or loss on the transaction on Schedule D (Form1040).

If you have other ordinary income related to digital assets

To report income from forks, staking, mining, etc., use Form 1010 (Schedule 1).

Source: IRS

End of IRS Material

Zaher Fallahi, Tax Defense Attorney, CPA, assists taxpayers nationwide with Cryptocurrency Tax, Anti-Money Laundering, Foreign Gifts & Inheritance, Delinquent FBAR filing, IRS audits, Tax Preparation, Offer-In-Compromise, Undisclosed Foreign Bank Accounts, and other international tax matters. Tel.: (310) 719-1040, (714) 546-4272 and (877) 687-7558 toll free nationwide. Websites: zflegal.com and zfcpa.com E-mail taxattorney@zfcpa.com