How To Fill Out Form 8949 for Cryptocurrency?

How To Fill Out Form 8949 for Cryptocurrency?

written by John Murphy | January 10, 2023

Governments around the world have started bringing cryptocurrency gains under tax nets. The U.S. government’s Inland Revenue Service (IRS) has also designed a form known as form 8949 for reporting incomes from cryptocurrencies. Since it is a relatively new addition, and if you are not sure how to fill out form 8949 for cryptocurrency, worry not, as this article will enable you to complete it yourself.

Currently, cryptocurrency taxes are on the authority’s radar, and they are keeping a close eye on its trading. Therefore, you should record all crypto incomes correctly to report cryptocurrency on taxes.

Additionally, all investors are required to report disposals on Form 8949. Unfortunately, completing this form is challenging, primarily if you use multiple wallets and exchanges.

Let us share everything you need to know about how to fill out form 8949 for cryptocurrency.

The step-by-step Guide to Fill Out Form 8949 

Many investors hire tax consultants to help them complete Form 8949. However, you can quickly fill it by yourself as well. Although it has a few technical details for which you may require professional advice, if you go through this article, we bet you can do it yourself.

So, let’s kick start our step-by-step guide to filling out Form 8949.

  • Step 1: Calculate Disposal Events 

The critical element of correctly filling out Form 8949 is to consider every single disposal event that occurred during the tax year. Since the right way to reach the correct taxable amount depends on such transaction. 

Furthermore, tax authorities require you to report each transaction across your wallet and exchanges on Form 8949. 

Examples of disposal events include the following:

  • Selling of cryptocurrency
  • Trading one cryptocurrency for another
  • Using cryptocurrency for the purchase of goods or services
  • Step 2: Gather Financial Information on Disposal Events

Secondly, you need to gather financial information associated with all disposal events. It includes the following details:

  • Description of the cryptocurrency sold (for example, 1.5BTC)
  • The date of purchase of cryptocurrency
  • The date of sale or disposal of cryptocurrency
  • Proceeds from the sale (the fair market value at the time of sale minus related fees)
  • Cost basis for purchasing cryptocurrency
  • Calculate gain or loss

If you struggle to get the above information, tax software like Coin Ledger can help you. Furthermore, this software is integrated with top exchanges; thus, they can easily calculate the required information from your transactions.

  • Step 3: Segregate Short-term and Long-term transactions

Form 8949 has two sections – long-term and short-term. You are required to report incomes from disposal transactions accordingly.

If you dispose of cryptos after holding them for less than 12 months from the purchase date, it falls under the short-term section. Contrarily, any crypto held for more than 12 months before being disposed of is categorized as long-term.

Furthermore, segregation is handy for applying the correct tax rate, as both categories have different tax rates. Long-term disposals have favorable tax rates.

Short-term capital gain tax rate: 10-37%

Long-term capital gain tax rate: 0-20%

  • Step 4: Filling-up the Form

In Part 1 of Form 8949, you must tick one of the below three options.

  • Option A: Select this option if you have reported short-term transactions on form 1099-B
  • Option B: Select this option if you have not reported short-term transactions on form 1099-B
  • Option C: Select this option if your exchange has already registered short-term trades on Form1099-B

In most cases, your exchange will not have reported transactions to you, so you will most likely tick Option C. However, if your platform has said short-term trades, then you need to tick option A or B, depending on the nature of the report.

  • Step 5: Report Disposals on Form 8949

Now, you are all set to report cryptocurrency disposals on Form 8949. Let us understand it with the help of an example.

  • Ben buys $ 300 in Bitcoins
  • Five months later, he traded his Bitcoin for Ethereum at $ 500
  • One month later, Ben sold Ethereum for $ 600

Here’s how Ben will report these transactions on Form 8949:

Bitcoin Data:

(a) Description of Property: Bitcoin

(b) Date Acquired: Jan 1, 2022

(c) Date Soled or Disposed of: July 1, 2021

(d) Proceeds (Sales Price): $500

(e) Cost or Other Basis: $300

(f) Write adjustments, if any 

(g) Write adjustments, if any

(h) Gain or (Loss): $200

Ethereum Data:

(a) Description of Property: Ethereum

(b) Date Acquired: July 1, 2022

(c) Date Soled or Disposed of: Aug 1, 2021

(d) Proceeds (Sales Price): $600

(e) Cost or Other Basis: $500

(f) Write adjustments, if any 

(g) Write adjustments, if any

(h) Gain or (Loss): $100

  • Step 6: Report Net Gain or Loss on Schedule D

Once you have completed reporting disposals on Form 8949, you have to transfer net gain or loss from short-term and long-term transactions on Schedule D.

That is it! You now know how to fill out Form 8949 for cryptocurrency.

Frequently Asked Questions

Can I offset my losses against gains?

Yes! IRS allows you to offset losses against gains of the same category in the same tax period; however, the upper limit is $ 3,000.

Can I fill out Form 8949 by myself?

Form 8949 is not very complex, and investors can quickly fill it by themselves; however, seeking professional advice is advisable if there are multiple transactions.

What is the rate of tax on cryptocurrency?

Income from cryptocurrency is categorized as capital gain, and there are different rates for short-term and long-term capital gains.

What forms do I need to use to report crypto taxes?

Form 8949 records disposals, while Schedule D reports net capital gain or loss.

Parting Thoughts

Since cryptocurrency will make the world a better place, the best ways to secure your crypto is to report it for taxation purposes. Many countries have levied taxes on crypto trading. Therefore, gone are the days when investors enjoyed zero taxes on crypto gains.

Therefore, investors in the U.S. have to file Form 8949 bearing details of each disposal made during a particular tax year, and subsequent net gain or loss is then transferred to Schedule D. We have mentioned an easy step-by-step guide to fill out Form 8949 in this article. 

Similarly, there are legal ways to avoid taxes on cryptocurrency; thus, many investors search for – how to avoid taxes on cryptocurrency.

We hope you are now able to fill out Form 8949 by yourself without paying money to tax professionals.