The IRS current guidance treates cryptocurrency as property when it comes to federal taxation of the asset class. This ultimately means that the IRS mandates reporting of cryptocurrency assets on a form known as IRS Form 8949. This form captures the capital gains and losses of crypto, the time the asset was held, as well as whether the transactions were disclosed on other tax filing forms, like 1099-B or the new 1099-DA.
Understanding IRS Form 8949
Form 8949 isn't a crypto specific one, rather it an IRS form that is used to report the disposal, or sale, and or exchange of capital assets. In it's most recent guidance from 2019, the IRS categorizes most crypto as a capital asset.
It's important to note that Form 8949 does not report other form 1099s, rather form 8949 is meant to consolidate the information that is issued from brokerages, exchanges, and entities about capital asset trading activity on forms 1099-B, 1099-DA, and 1099-s.
One issue that surrounds crypto is that the current form 1099-B has a location for cost-basis of an asset. For users that only use a singular exchange for all of their activity, this may be okay. In scenarios where a 1099 captures all of the trading activity of an individual, form 8949 might not be necessary to file. However, because crypto is often transfered between exchanges, wallets, and other platforms, the cost basis reported from one 1099 issuer is often incorrect. It's this issue that necessitates the creation of form 8949, usually through an automated crypto tax tool, in order to harmonize all of the various 1099s an individual might recieve, especially for crypto and digital assets.
How to Calculate Capital Gains for Form 8949
Calculating capital gains and losses for crypto is done in the same way that it is for other assets. To start, you first have to calculate cost basis.
Calculating Crypto Cost Basis
Cost basis (CB) is defined simply as the total sum you spent to acquire an asset, including purchase price, transaction cost, and brokerage or exchange fees. The crypto cost basis formula is as follows:
(Crypto Purchase Price + Fees) / Quantity
After you've calculated cost basis, this factors into the larger capital gains and losses equation. That equation looks as follows:
Proceeds - Cost Basis = Capital Gains or Capital Losses
In this equation, proceeds is simply how much you got in fiat or crypto for the disposal or sale of an asset. For Form 8949, the information will need to be input as follows:
- Column A: The Name of the cryptocurrency or asset - Ex. BTC, LTC, ETH, etc.
- Column D: The Proceeds of the disposal
- Column E: The Cost Basis
- Column H: the Capital Gain or Loss
Do I need to use Form 8949?
Form 8949 is specifically used for if you've incurred capital gains or losses on an asset. This means that if you've simply held crypto and made no disposal or sale, then you won't need to file form 8949. However, crypto is a little different than traditional assets, meaning that there are some fringe scenarios that the IRS treats as a sale, even though you might not think the action is qualified as such. These scenarios are as follows:
- Purchasing crypto, even if by exchanging one crypto for another, and/or selling crypto for a profit
- Exchanging crypto for goods and services
These two scenarios account for 95% of all crypto tax scenarios, but it's important to note that there are a few other fringe scenarios. You can read more about which transactions are taxable and which aren't in our post on the topic here.
How to Fill out Form 8949
It's important to note that generally speaking, there are tools that can automate your form 8949 creation process. For example, the Ledgible crypto tax platform ingests your crypto data and automatically creates form 8949 for you. That said, if you do want to go through the process of filling out the form yourself, here are the instructions.
Step 1: Check box A,B, or C at the Top of the form
To start the form, you'll need to add in some initial information. You'll have to select A, B, or C to categorize the transactions of the form. Those options detail whether:
A) the transaction was reported to the IRS on form 1099
B) The transaction was not reported to the IRS and is found on a form 1099
C) The transaction wasn't captured and reported to you on any 1099
Step 2: Arrange your calculations for each transaction
For each transaction, you're going to need the following data:
- Description of property - type of asset and type of disposal or acquisition
- Date acquired
- Date sold or disposed of
- Proceeds - see above
- Cost basis - see above
- Gain or (loss) - final capital gain or loss
Step 3: Aggregate all of your individual transactions in the boxes at the bottom of the form
After you've gone through the above step for every transaction on the form, you'll need to total up everything nice and neatly at the bottom of the form. This provides the IRS with the calculated total Gain or Loss, cost basis, and proceeds.
While this breaks down how to fill out form 8949 in 3 simple steps, you can likely tell that steps 2 and 3 can get quite time consuming, especially for active crypto traders. This is why most people choose to use tools like Ledgible to aggregate, normalize, and make all of their crypto transactions Ledgible for tax filing, like on form 8949. Ledgible also integrates with TurboTax, and nearly every other consumer and professional tax software.
What is form 1099-B
If you've made it this far in the post, you might be wondering what exactly form 1099-B is. These are the forms detailing your trades on a given platform, like an exchange. These forms are issued on a per-exchange basis, meaning that they do not contain information that occured outside of a given exchange. As mentioned before, if you had trades between multiple platforms, then you'll need form 8949 to consolidate all of your various form 1099s.
It's important to note too that form 1099-B will likely be replaced by form 1099-DA (DA: Digital Assets) in the coming year.
You can read more about what form 1099B is here in our more exhaustive post here.