Form 8949 & Schedule D (Form 1040): Cryptocurrency Tax Reporting Guide [2024]

<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Starting January 1, 2024, the Infrastructure Investment and Jobs Act requires reporting 10,000$+ crypto transactions to the IRS. Yet, the Treasury and IRS deferred digital asset reporting until new regulations are set, promising future guidance and public input on these rules. We keep you informed! </p></div></div></div>

Do I Need to Declare Cryptocurrency on My Tax Return?

In the U.S., declaring cryptocurrency transactions on tax returns is mandatory. The IRS uses various forms for different crypto activities: Forms 1099 for income, Form 8949 for capital gains, and Form 1099-B for other transactions. Form 1099-MISC is for crypto compensation, and Form 1099-NEC for payments to non-employees. Besides these, other 1099 forms cater to specific crypto reporting needs. 

This article aims to guide you through accurate reporting to avoid penalties. For comprehensive details on U.S. crypto taxation, refer to our extensive guide.

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Who Has to Fill Out Form 8949 for Cryptocurrency?

You should report your cryptocurrency transactions on Form 8949 in the following situations:

• Selling or trading cryptocurrency or NFTs for a profit
• Incurring losses from selling or trading cryptocurrency or NFTs
• Using cryptocurrency to make purchases

However, transactions within a self-directed crypto IRA—a retirement account that allows for the inclusion of cryptocurrencies and offers traditional IRA tax advantages—do not require reporting on Form 8949 due to its tax-advantaged status.

To accurately report crypto transactions to the IRS, use:

• IRS Form 8949 for detailing capital gains and losses from crypto disposals
• Schedule D and Form 1040 for broader tax reporting

Remember, anytime you've disposed of crypto—by selling, swapping, or spending—it should be included on Form 8949.

The Role of Schedule D (Form 1040) in Your Tax Return

After completing Form 8949 with details of your crypto disposals, you need to summarize your net short-term and long-term capital gains or losses on Schedule D (Form 1040). This form plays a critical role in your tax return, encompassing not just cryptocurrency activities but also gains or losses from businesses, estates, and trusts.

Schedule D Usage: It's where you report capital losses carried forward from previous years, ensuring your investment outcomes for the tax year are accurately reflected.

Comprehensive Reporting: Schedule D ensures that your overall capital gains tax liability is calculated correctly, incorporating the net result of all your investment activities, including those in the cryptocurrency space. This step is vital for accurately determining your tax obligations based on your investment performance.

Step-by-Step Guide to Filling Out Form 8949

Step 1: Compile Your Crypto Transactions

Begin by gathering details of every cryptocurrency and NFT disposal you've made throughout the tax year. This includes sales, trades, and any crypto used for purchases. Essential information includes:

• Description of the sold property (e.g., 1.5 BTC)
• Acquisition date
• Sale or disposal date
• Sale proceeds
• Purchase cost basis
• Calculated gain or loss

Accuracy in tracking proceeds and cost basis is crucial. If you lack precise records, consider utilizing crypto tax software for a detailed tax report.

Step 2: Categorize Transactions by Holding Period

Divide your disposals into short-term (held for less than 12 months) and long-term (held for more than 12 months), as Form 8949 requires separation by holding duration. Long-term disposals benefit from lower tax rates, but remember, incomes over 200,000$ may incur an additional 3.8% net investment income tax.

Step 3: Identify the Correct Reporting Category

For both short-term and long-term sections, you'll choose from one of three checkboxes based on whether the basis of transactions was reported to the IRS on Form(s) 1099-B. The options are:

1. Basis reported to the IRS
2. Basis not reported to the IRS
3. Transactions not reported on Form 1099-B

Most likely, you'll choose option (c), as cryptocurrency exchanges rarely issue Form 1099-B. If you've received a Form 1099-B, select either option (a) or (b) accordingly.

Step 4: Documenting Individual Transactions and Summarizing Totals

Whenever you've 'transacted' with crypto by selling, exchanging, or using it for purchases, it's necessary to report it on this form. For each transaction, you must provide the following details:

(a) What the asset is, such as 1 BTC.

(b) When you initially acquired the asset, such as March 1, 2023.

(c) When you sold or otherwise transacted the asset, such as June 1, 2023.

(d) The selling price according to the fair market value, such as 40,000$.

(e) The original cost of the asset based on the fair market value, such as 20,000$ plus 100$ in transaction fees.

(h) The profit or loss from the transaction, such as 19,900$.

In both the short-term and long-term sections, at the end of the page, you must calculate and fill in your totals. This includes your cumulative proceeds, total cost basis and overall gains or losses.

How to Accurately Fill Out Schedule D (Form 1040)

After completing your disposal reports on Form 8949, you must then report your net short-term and long-term capital gains or losses using Schedule D. Here's a structured guide to help you navigate through Schedule D, divided into three main parts:

Part 1: Short-term Capital Gains and Losses

Begin with Part 1 for short-term gains and losses, referring to transactions held for less than a year. Fill out lines 1a, 1b, 2, or 3, based on the category checked in Form 8949. You'll need to detail:

Total proceeds (d)

Total cost basis (e)

Total gain or loss (h)

Line 6 is crucial for reporting any short-term capital loss carryover, and line 7 aggregates your net short-term capital gains or losses.

Part 2: Long-term Capital Gains and Losses

In Part 2, focus on long-term gains and losses from holdings over a year. Similar to Part 1, fill out lines 8a, 8b, 9, or 10 according to Form 8949's indicated category, detailing:

Total proceeds (d)

Total cost basis (e)

Total gain or loss (h)

Line 14 allows you to report any long-term capital loss carryover, with line 15 summarizing your long-term net capital gains or losses.

Part 3: Summary

The Summary section combines the results of Parts 1 and 2. Line 16 requires you to merge the amounts from lines 7 and 15. Depending on whether you have a net capital gain or loss, you'll proceed differently:

For a net capital gain, complete lines 17 through 20.

For a net capital loss, move directly to line 21.

Ensure these totals are reported on line 7 of Form 1040. Remember, a maximum of 3,000$ in net capital losses can be offset against your income or capital gains annually.

Form 8949 Reporting Requirements With or Without Form 1099

Whether you've received a Form 1099 from cryptocurrency exchanges or not, you're obligated to complete Form 8949 for cryptocurrency transactions. Form 1099 may not always accurately capture your cost basis or proceeds due to transfers into or out of exchanges. It's crucial to verify the details on these forms to ensure accurate tax reporting. 

If no Form 1099 was issued to you, you must still report any crypto disposals on Form 8949. Omitting taxable income from your tax return can lead to charges of tax evasion, carrying severe penalties.

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Simplifying Form 8949 and Schedule D (Form 1040) with Crypto Tax Software

Crypto tax software streamlines tax preparation by automating transaction recording and reporting. It tracks gains, losses, and other data across platforms, filling out forms like Form 8949 and Schedule D with your data, enhancing accuracy and saving time.

Blockpit exemplifies this by importing your transaction history via API, Public Keys, or CSV, calculating your capital gains and losses. It auto-fills necessary forms, offering IRS-compliant reports, making tax filing simpler and ensuring adherence to US crypto tax regulations.