Reporting Income and Gains to the IRS and Paying the Tax
Last updated
Last updated
You should calculate your capital gains using your chosen accounting method and report the gains on Form 8949 and Form 1040 (Schedule D) of your tax return.
This form is used in part to report the sale or exchange of capital assets not reported on another form. It lists all of your transactions that qualify as a capital transaction resulting in a capital gain or loss. Information reported on the form includes the date the assets were acquired, the date of disposition, your proceeds (typically the FMV at time of sale), your cost basis, and your gain or loss. At the bottom of the form you need to declare your total proceeds, cost basis, and gains/losses for the year.[1]
Schedule D on Form 1040 is used to summarize the overall gain or loss from the transactions reported on Form 8949. Form 8949 has sections for long term or short term activities and gain or losses are listed in each.[2]
Recap securely manages your cryptocurrency data and calculates your gains/losses based on your chosen cost basis method. You can download a ready to file Form 8949 and file yourself or you can pass our report to your CPA. They will then be able to complete the Tax Return and advise on certain tax positions based on your specific circumstances.
Capital losses can be deducted against any capital gains in a tax year.[3] For example if you sell stocks and make a profit, you can use any losses incurred from your cryptocurrency activities to reduce your taxable gains made from the sale of stocks.
If after deducting your capital losses against your capital gains you still have remaining losses, you can use those losses to offset up to $3,000 of ordinary income per year. If your capital losses exceed your capital gains by more than $3,000, the remaining losses may be able to roll over to the next year to be used against future capital gains and ordinary income.[4] You cannot choose to pay capital gains tax and roll capital losses over to the following year; you must use any losses to offset capital gains in the current tax year first before using them against ordinary income or rolling them over.
All capital losses should be reported on Schedule D of your tax return. It is important to do this as this ensures they can be “claimed” to use against future gains.
Cryptocurrency received and classified as Income should be reported under “Other income” on Line 8 of Schedule 1 of your income tax return.
The deadline for filing your taxes to the IRS is normally April 15. For the 2022 tax year (filed in 2023) the deadline is April 18, 2023. But you can file for an extension to 16th October.
California storm victims have an extended deadline until May 15, 2023 to file various federal individual and business tax returns and make tax payments.
There are two penalties that commonly apply to late-filed tax returns- one for filing late and one for paying late. They can add up fast. Interest accrues in addition to penalties. To avoid the late filing penalty you can apply for an extension of 6 months by submitting Form 4868 before the tax return deadline. However, an extension to file is not an extension to pay – you should make all payments by the original tax deadline to avoid late payment penalties.
If you need to amend a previous tax return you can do this using Form 1040X.
We hope that you found this guide helpful – if you have any more questions, feel free to reach out to us on twitter @recap_io
Disclaimer:
The content of this guide is for general informational purposes only. It is not legal or tax advice. Viewing this guide does not create an attorney-client relationship or a tax advisor-client relationship.
The information in this guide represents our general opinions; however, some of the topics in this guide are still subject to debate amongst professionals, and the IRS could ultimately release guidance that conflicts with the information in this guide. The information contained in this guide is based on the authors’ interpretation of the Internal Revenue Code (“Code”). Changes to the Code may be retroactive and could significantly alter the views expressed herein. Therefore, use this information at your own risk and for information purposes only.
Consult a professional regarding your individual tax or legal situation.
[1] Instructions for Form 8949 (2020), I.R.S., https://www.irs.gov/instructions/i8949.
[2] 2021 Instructions for Schedule D (2021), I.R.S., https://www.irs.gov/instructions/i1040sd.
[3] 2021 Instructions for Schedule D (2021), I.R.S., https://www.irs.gov/instructions/i1040sd.
[4] 2021 Instructions for Schedule D (2021), I.R.S., https://www.irs.gov/instructions/i1040sd.
