The IRS is making big changes starting Jan 1, 2025, and if you don’t prep now, you could pay more in crypto taxes or face penalties. Here’s what you need to do before the year-end to avoid penalties, save money, and stay ahead of the game.
Understand Crypto Tax Basics
At a high level, the following transactions lead to taxable events.
• Selling crypto for fiat
• Trading one cryptocurrency for another
• Spending crypto on goods or services
• Earning crypto through staking, mining, or rewards
• Receiving airdrops or hard forks
If you have engaged in any of these activities in 2024, you will likely need to file Form 8949, Schedule D, or Schedule 1 with your taxes next year.
Non-taxable transactions include transfers between your own wallets or exchange accounts, and sending or receiving crypto gifts. Even though these are not taxable, you still need to track them for accurate record-keeping.
Use Crypto Tax Software
Today, most cryptocurrency exchanges don’t send you detailed tax forms like stock brokers. However, you are still responsible for accurately tracking and reporting your crypto gains and losses. Manually calculating crypto gains and losses is nearly impossible, especially if you have numerous transactions across multiple wallets & exchanges. You can use a reputed crypto tax software tool to automate this process.
Crypto tax software tools connect with your wallets and exchanges (read-only access), automatically calculate gains and losses, and generate necessary tax forms like Form 8949, Schedule D, Schedule 1, and other reports you need to submit with your tax return.
Set Aside Funds for Taxes
Made crypto profits this year? Congratulations! But remember, the IRS expects a cut of those gains.
A good rule of thumb is to set aside 25% - 30% of your profits in cash or stablecoins to cover the upcoming tax bill. (In some cases, these percentages can be as high as 37%)
If you have profited over $100,000 in crypto, consider hiring a qualified CPA to project your tax liability. This will ensure you are not caught off guard when tax season rolls around.
Harvest Crypto Losses to Offset Crypto Gains
If some of your investments are underwater (the market value is below how much you paid for the investment), you can consider selling these positions before the year-end to harvest losses. These losses can help you offset current-year crypto gains and even carry forward these losses to the future in some cases. Make sure to tax loss harvest before December 31, 2024, to take advantage of the strategy and reduce your 2024 tax bill.
Switch to the Per-Wallet Tracking Method
Starting January 1, 2025, the IRS will no longer allow the Universal cost basis tracking method for crypto assets. Instead, you must use the Per-wallet method. (Rev. Proc. 2024-28)
Here’s the difference:
• Universal Method: Assumes you have one giant wallet. You could sell crypto from one wallet but report it as sold from another to minimize taxes. Ex: Wallet A and Wallet B have 1 BTC each. You sell 1 BTC at wallet B. For tax purposes, you can say you sold the BTC at Wallet A.
• Per-Wallet Method: Requires you to report transactions based on the specific wallet used. Ex: Wallet A and Wallet B has 1 BTC. You sell 1 BTC at wallet B. For tax purposes, you can only say you sold the BTC at Wallet B.
If you have been using the Universal method, make sure to transition into Per-wallet method by December 31, 2024, to stay compliant. Ignoring this change could result in penalties in the future.