Lolli and TaxBit team up to bring you a guide to crypto tax reporting.
For United States-based traders, tax season has arrived. This year, we’re proud to announce that we’ve partnered with crypto-focused tax reporting service TaxBit to help make the tax reporting process more seamless. Through our partnership with TaxBit, Lolli customers can sign up and save 10% on TaxBit's service via this link. Lolli users can easily link their Lolli wallet to automatically pull transactions through TaxBit’s tax engine and auto-generate their tax forms.
All tax reporting can be daunting, and reporting your cryptocurrency taxes can be especially complicated. TaxBit and Lolli have teamed up to answer taxpayers’ most frequently asked questions when reporting taxes on their cryptocurrency transactions.
Should I file taxes on my crypto?
The short answer is yes. The IRS now asks all taxpayers if they are engaged in virtual currency trading activity on the front page of their tax returns. Lolli and TaxBit are leading the charge in making it easy for Lolli traders to report their cryptocurrency activity.
How is cryptocurrency taxed?
In the U.S., cryptocurrency is taxed as a capital asset, like property. Every taxable event — as defined by the IRS — must be reported on an IRS 8949 cryptocurrency tax form. With TaxBit, you don’t have to worry about figuring out which of your crypto trades are considered taxable events. TaxBit's software is integrated with Lolli and automatically determines what trading activity among customers is subject to taxation.
What changed for the 2020 tax season?
Starting in 2020, the IRS added a question to its personal federal income tax form (1040) that asks taxpayers, “at any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
If a taxpayer answers “Yes” to this newly included question on their income tax filing, then the IRS will look to see if the taxpayer filed an 8949 form to report capital gain/loss for virtual currency transactions.
If the taxpayer fails to report their cryptocurrency taxes, the IRS can now prove intentional disregard for knowingly failing to report cryptocurrency taxes. Fortunately, similar to the sale of stock, 26 U.S. Code § 1211 of the Internal Revenue Code provides relief in the form of a deduction for losses on capital assets.
How to report capital gains on crypto
According to U.S. tax law, there are two types of capital gains that can be calculated when you sell a given asset — short-term and long-term capital gains.
Short-term capital gains
If you hold a particular cryptocurrency for one year or less, then your transaction — in the case that you sell crypto for fiat or trade crypto for crypto — will be eligible to be taxed for short-term capital gains. Short-term capital gains are added to your income and taxed at your ordinary-income tax rate.
Long-term capital gains
If you held a particular cryptocurrency for more than one year then you are eligible for tax-preferred long-term capital gains. The long-term capital gains tax rate is 0%, 15%, or 20% depending on your taxable income and filing status. They are generally lower than short-term capital gains tax rates.
How to report losses on crypto trades
With wild price swings and volatile coins, most crypto traders lived through the unfortunate reality of losing money on their trades at least once in a taxable year. Fortunately, the IRS allows taxpayers to claim deductions on their cryptocurrency capital losses.
TaxBit provides the required IRS 8949 cryptocurrency tax form, which will be transposed onto a taxpayer’s Schedule D tax form. Schedule D (Form 1040) is used to report your capital gains and losses in the sale or exchange of capital assets that are not held for business or profit.
Please note, ordinary income is not reported on a Schedule D form. Crypto mining income is considered ordinary income and should be reported via W-2 form.
Why crypto traders should report losses
Speaking to the overall importance of reporting both gains and losses on crypto trades, Kevin F. Sweeney, a former U.S. federal tax prosecutor, stated last year that “failing to report your losses and gains could have big consequences.”
Reporting your losses on crypto transactions has the added benefit of potential tax deductions. Taxpayers can deduct $3,000 in capital losses a year ($1,500 if you are married and filing a separate tax return). Claiming your cryptocurrency capital losses can result in a higher refund on your tax return via this deduction.
Also important to note, if a taxpayer has more than $3,000 in net capital losses in a taxable year, then the excess losses can be carried forward into future tax years. A taxpayer may then use the losses to offset capital gains in a future tax year or can claim the capital loss deduction again.
Cryptocurrency fees and Cost Basis
In 2020, with itemized investment-related expense deductions eliminated, taxpayers can account for all fees the same way by adding them into their buying and selling costs.
Cryptocurrency traders can save money on their transaction fees by adding the cost of fees into their cost basis when reporting buy and sell transactions. The cost basis is the original price of an asset, which is used to determine a capital gain or loss when the asset is sold.
Example of fees when buying crypto
If a taxpayer buys 1 Bitcoin when 1 BTC = $10,000, and pays $50 in fees, then the IRS allows you to report a cost basis of $10,050. Adjusting for fees allows a lesser realized taxable gain.
Example of fees when selling crypto
This same example applies inversely for fees when selling cryptocurrency for a profit.
If the taxpayer purchased BTC at $10,000, sells it for $11,000 and pays $50 in fees, then the IRS allows the taxpayer to deduct the $50 from the proceeds amount. In this example, the taxpayer would report proceeds of $1,050 from selling the crypto.
Forks and airdrops
The IRS has also provided guidance on how to tax crypto that a trader may receive as the result of a blockchain hard forks — when one blockchain upgrades and splits to form a new blockchain and corresponding crypto asset. The IRS states that hard forks that result in an airdrop of a new cryptocurrency — meaning you automatically receive that new crypto asset if you own the asset that is being formed — are akin to a dividend for tax purposes.
How to file your crypto taxes with TaxBit
If your trading on Lolli is taxable, a Form 1099-B tax statement — which contains your taxable trading activity on Lolli — is now available, as has already been in your email.
TaxBit automates the process of producing the necessary tax forms for cryptocurrency traders. After a taxpayer downloads their IRS 8949 tax form from within their TaxBit account, they can incorporate the completed form into their full tax return.
If a taxpayer is filing their own taxes, then they can easily upload their IRS 8949 tax forms into a popular tax filing software such as TurboTax, TaxAct, or TaxSlayer. Alternatively, if the taxpayer uses an accountant to file their tax return then they can provide their accountant with the completed IRS 8949 tax forms to have them incorporated into their tax return.
All previous tax years included
As a cryptocurrency tax software founded by CPAs and tax attorneys, TaxBit believes in helping taxpayers comply with their tax obligations — even retroactively. To this end, TaxBit’s Plus and Pro plans include all prior-year tax forms.
We’ve found that many cryptocurrency traders are just now filing their crypto taxes for the first time, based on the new crypto-related question on their income tax form. Some taxpayers may wish to amend prior-year tax returns to report their cryptocurrency activity in previous tax years.
TaxBit includes prior-year tax forms to lessen the burden of taxpayers ’ backfilling to retroactively tax compliant.
All Lolli customers can save 10% off the annual TaxBit subscription by using this link to sign up on TaxBit:
https://taxbit.com/invite/lolli-1?fpr=stacksats or coupon code stacksats
Want $10 in Free Bitcoin?
Share your referral code with a friend. When they make their first purchase with a Lolli retailer, we will give you both $10 in free bitcoin.
Keep stacking sats,
The Lolli Team 💜
*Bitcoin back rates subject to change.