1) Calculate Your Gains or Losses: The first step to managing your crypto taxes is understanding the gains or losses associated with your cryptocurrency transactions. This involves calculating your cost basis, which is the price you paid per unit of digital assets. From there, you can compare this cost to the amount you received when you sold or exchanged your crypto to determine the overall financial impact of the transaction.
2) Record Your Trades: You must keep accurate records of all your trades, exchanges, and other activities involving cryptocurrency. Make sure to track the date and time of each transaction, the amount of crypto involved, and the USD value of the transaction.
3) Gather Supporting Documents: Crypto taxes can be complicated and require more information than just calculating gains or losses. Collect all relevant documents for your trades, such as exchange accounts, wallet transaction records, and other supporting evidence.
4) Report Your Earnings: When it comes time to file your taxes, you’ll need to report any gains or losses from your cryptocurrency transactions. This means filing Form 1040 with Schedule D and Form 8949, which are forms specifically used to report capital gains and losses from investments.
5) Automate the Process: If you’re dealing with multiple crypto transactions, it pays to use a tax software that can automate the taxing process. Cryptocurrency tax software can help you quickly generate accurate reports and easily provide the necessary documentation to the IRS.