The IRS issued Notice 2014-21 in 2014, stating that cryptocurrencies, such as Bitcoin, should be treated as property for federal tax purposes. This was further clarified in 2019 with Revenue Ruling 2019-24, which categorized cryptocurrency as capital assets and equities. As a result, taxpayers are required to report capital gains and losses related to cryptocurrency transactions on IRS Form 8949 while keeping the associated Form 8949 instructions in mind:
- Capital gains and losses must be reported properly
- Short-term or long-term transactions must be mentioned
- Mention if the transactions were disclosed on a 1099-B
But before we discuss IRS Form 8949 instructions in-depth, first let’s take a quick look at why the 8949 Form is necessary for taxpayers.
What is Form 8949 and What is its Purpose?
Form 8949 is used to report the sale and exchange of capital assets and can be harmonized with the IRS through Forms 1099-B and 1099-S. Always report sales proceeds in column (d) and basis in column (e) of Form 8949. If corrections or adjustments are needed, use column (g). If Forms 1099-B show that your basis was reported to the IRS and no adjustments are necessary, you may not need to file Form 8949.
Its Purpose for Individuals
Form 8949 is used by individuals to report various transactions, such as the sale or exchange of capital assets not reported on another form or schedule, gains from involuntary conversions, nonbusiness bad debts, and the worthlessness of security. It also allows for the deferral of capital gain invested in a qualified opportunity fund (QOF) and the disposition of interests in QOFs. Married couples filing jointly should complete as many copies of Form 8949 as necessary to report all their transactions and include the combined totals on their Schedule D.
Its Purpose for Corporations and Partnerships
Form 8949 is used by corporations and partnerships to report various transactions, such as the sale or exchange of a capital asset not reported on another form or schedule, nonbusiness bad debts, undistributed long-term capital gains, and the worthlessness of security. It also allows for the election to defer capital gain invested in a qualified opportunity fund (QOF) and the disposition of interests in QOFs. In addition, corporations and partnerships can use this form to report the sale of stock of a specified 10%-owned foreign corporation, adjusted for the dividends-received deduction under section 245A, but only if the sale would otherwise generate a loss.
Its Purpose for Estates and Trusts
Form 8949 is utilized by estates and trusts, including non-grantor trusts, to report transactions such as the sale or exchange of a capital asset not reported on another form or schedule, nonbusiness bad debts, the worthlessness of security, the election to defer capital gain invested in a qualified opportunity fund (QOF), and the disposition of interests in QOFs.
Schedule d Instructions and its Purpose
- To calculate your net gain or loss from transactions reported on the form.
- To report gains from Forms 6252 or 4797, and from Forms 4684, 6781, or 8824.
- To report capital gain distributions not directly reported on your tax return.
- To report capital loss carryovers from prior years.
- To report your share of gains or losses from partnerships, S corporations, estates, or trusts (except for corporations).
- To report certain transactions that are exempt from reporting on Form 8949.
In addition, individuals, estates, and trusts may use Schedule D to report undistributed long-term capital gains from Form 2439.
After Schedule D instructions, let’s look at what is new in the Form for 2022 taxpayers.
What’s New in 2022-2023?
- Form 8949 is required for both grantor and non-grantor trusts.
- Foreign corporate partners should also use this form to report any effectively connected capital gain (or loss) in Part II, with box F checked, by entering “From Schedule P (Form 1120-F)” in column (a), and the gain or loss in column (h). Detailed instructions are provided in the Schedule P (Form 1120-F) guidelines.
With that in mind, let’s go ahead and find out how you can report your gains and losses.
How to Report Gains/Losses
Just like equities, when you buy a cryptocurrency, it sets a cost basis—the original value or purchase price of an asset or investment—and if you sell or trade the digital asset, it is a taxable event. To ascertain the gains/losses, all you need to do is deduct the proceeds from the cost basis: Proceeds – Cost Basis = Capital Gains/Losses.
For instance, if you bought 5 Litecoin (LTC) for $342.87 and later sold them for $785.26 then your capital gain will be 785.26 – 342.87 = 442.39. This transaction is supposed to be reported on 8949. Below are the IRS Form 8949 instructions:
- Under column (a) mention the name of the property (LTC)
- Under column (d) mention the proceeds ($785.26)
- Under column (e) mentions the cost basis ($342.87)
- Under column (h) mention your gain ($442.39)
This is but one transaction, traders have hundreds if not thousands of transactions as they buy/sell/trade cryptocurrency every day. And as every transaction is a taxable event, it must be itemized and reported.
Who Must File Form 8949?
First, you should know that you don’t have to pay taxes on cryptocurrency if you haven’t realized a taxable gain. However, contrary to other investment types, you can realize a gain on crypto in two ways:
- Purchasing and selling coins for a profit
- Exchanging tokens for goods and services
If any of the above two cases apply to you, it is considered a taxable capital gain and you have to declare it. But, if you have a realized gain in an IRA account, which is a tax-advantaged account, you don’t have to report your transactions.
Lastly, if you booked a loss while selling your tokens, you’ll be able to deduct it while reporting your taxes. Still, you have to declare that you’ve suffered a loss while selling crypto. It might be cold comfort, but you’ll get a tax break.
IRS Instructions For Form 8949 – How to Fill the Form
The 8949 Form can be quite daunting for newbie taxpayers. For this reason, we have mentioned how to fill the 8949 Form step-by-step:
At the top of the 8949 Form, you’ll see some initial information, you need to fill that information. Select check box A, B, or C in Part I for short-term trades:
- (a) Short-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS
- (b) Short-term transactions reported on Form(s) 1099-B showing basis wasn’t reported to the IRS
- (c) Short-term transactions not reported to you on Form 1099-B
Usually, crypto exchanges do not provide Form 1099-B to the investors, so you are most likely to select checkbox C. However, if your exchange provides you a 1099-B form, you should check A or B.
Next, proceed to each row and arrange your calculations with the details of each transaction:
- Description of property: Here you have to mention the details about the asset that was sold, exchanged, or spent. For instance: 1.75 BTC
- Date acquired (MM/DD/YYYY): This date is used as your cost basis as you purchased the digital asset on this date.
- Date sold or disposed of (MM/DD/YYYY): This is the date you sold, exchanged, or spent your digital asset.
- Proceeds: This is the total USD price of the sold, exchanged, or spent digital asset.
- Cost basis: This is the total USD worth of the acquired digital asset that you sold, exchanged, or spent. This part also includes purchases made in fiat currency or another cryptocurrency.
- Adjustment, if any, to gain or loss: The adjustment amount entered in column (g) is explained in this code. Usually, you won’t have adjustments but if you need them the IRS mentions them in their instructions.
- Adjustment, if any, to gain or loss: The description code entered in column (f) will directly relate to the amount you mention here. Usually, you won’t have any adjustments.
- Gain or (loss): Deducting column (e) from column (d) and combining the result with column (g) will show you your bet capital gain or loss in USD.
Next, your Totals must be included in the aggregate boxes placed at the bottom of the form
- Total Proceeds: Total sales price of your transaction
- Total Cost or other bases: Total acquisition prices
- Total Adjustment, if any, to gain or loss: Generally, you won’t have adjustments but if you do, report the total amount without any description
- Total Gain or (loss): Total of your capital gains or losses
If you witness a large cost basis and proceeds, don’t be alarmed as you were trading with large crypto volumes. For instance, if you trade with USD 10,000 worth of Bitcoin back and forth, you might see little gain or loss but the total cost basis and proceeds will still be large.
Further, these same IRS Form 8949 instructions are applied for the long-term trades in part II of the form.
Indubitably, filling up the 8949 Form is a tedious and perplexing task for beginner crypto investors and traders. Even for seasoned traders, it can be daunting to fill-up the form as they have hundreds if not thousands of transactions to log and calculate.
Here, ZenLedger clears the haze. ZenLedger is the leading cryptocurrency tax platform that helps investors as well as tax professionals in portfolio management. The platform is a result of technology, finance, and accounting veterans coming together with an aim to offer its users the ease of tracking their trades, clearly seeing their profits, and never overpaying their crypto taxes again.
How does ZenLedger do it? In three simple steps. First, import your crypto trading history from your crypto exchanges and wallets into ZenLedger. From here on, ZenLedger takes over and automatically calculates cost bases, fair market value, and gains and losses. Second, from the resolution center on the platform, review your transactions and incomes.
Finally, after reviewing your reports, the last step is to fill the IRS Form 8949, which is also automatically created but ZenLedger. Not only this, but ZenLedger also creates forms such as Schedule 1, Schedule D, Fincen 114 // FBAR, and many others. This not only makes it easier for the taxpayer to calculate their crypto taxes but also increases the accuracy of tax calculations.
Short and Long-term Transactions
The IRS Form 8949 is divided into two sections: Short-term gains and Long-term gains. If you sell your assets within a year then the short-term gains section is to be filled. However, if you sell your assets after a year, you are eligible for Long-term gains tax. Paying the long-term gains tax has benefits of its own such as you get favorable tax rates or you have to pay less tax. Hence, holding your digital assets with unrealized gains for more than one year is highly beneficial.
In case you have unrealized losses, it is beneficial to claim those losses and get your tax liability reduced. There is tax calculation software in the market that makes it easy for investor to track their holding periods and help them gain long-term tax advantages.
Transposing Your 1099-B
Capital assets brokers and exchanges have to provide a 1099-B tax form to the taxpayers on their platforms. This form contains information such as cost basis and proceeds from their transactions. As we have mentioned earlier, IRS 8949 has three boxes. If you received a 1099-B containing the cost-basis information, check box “A” for short-term assets. Similarly, check box “D” for long-term assets. Lastly, on your IRS 8949 Form, transpose the 1099-B.
If your 1099-B doesn’t comprise your cost basis and proceeds, then check box “B” for short-term assets, and long-term assets, check box “E.” Later on, you can fix any deficiencies on the 1099-B by adding the cost basis information. Let’s understand this with an example. If the information regarding transfers on or off the exchange is lacking on the 1099-B then you can fix any assumptions while filing the IRS 8949 Form.
What if you don’t receive 1099 from your crypto exchange?
Crypto exchanges are supposed to provide detailed information about your transaction on Form 1099. This form provides all the information you require to fill out Form 8949. Few crypto exchanges, however, don’t provide Form 1099, making you do all the hard work of keeping the records of the transactions.
Traders have to figure out the potential gains and losses on their own and they have to establish their holding period, cost basis, and proceeds. They have to dig deeper into their transaction records, noting down their buying and selling dates, proceeds, or anything else needed to fill out Form 8949. The trader also has to determine a short or long-term gain. It can become very complex if a trader has a plethora of transactions.
For instance, a trader bought 100 Bitcoin in January, 100 in March, and 100 in November 2020. Then in March 2021, the trader sold 250 Bitcoins for profit. Here, the trader has both short-term and long-term gains. But, how do they split the taxes between short-term and long-term?
In this case, they might have to use the “first-in, first-out” accounting method to identify a specific individual Bitcoin unit. This means that the trader will account for the oldest purchase first, up until all the coins sold are accounted for.
To Summarize – Form 8949 Instructions
Due to the consistent diligence of the IRS, digital assets such as cryptocurrencies are now eligible for taxes. Hence, investors and traders have to be vigilant about their sales and purchases as they owe money to the government in the form of taxes. Therefore, they must follow IRS instructions for Form 8949 properly to get as many tax benefits as they can.
