2. You need to disclose Bitcoin activity on your tax return
The IRS wants to know about your cryptocurrency transactions. In fact, the IRS is making its curiosity known on the front page of the tax return. If you take a look at Form 1040, you’ll notice the question, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
You are required to answer yes or no to the cryptocurrency question. Then, you’ll need to disclose your cryptocurrency activity on Form 8949. This is where you will report the date you acquired Bitcoin, sold it, the sales price, cost basis, and gain or loss. In order to complete this form and any other Schedules required for crypto reporting, you’ll need to keep good documentation. We’ll go into that next because documentation is essential if you plan to be a Bitcoin investor.
3. Make sure you document all Bitcoin transactions
If you haven’t documented any of your cryptocurrency transactions, taxes may become a nightmare — especially if you trade Bitcoin hundreds of times a year. Moreover, if you use Bitcoin to buy things, each purchase is also treated as a taxable sale. This is when you’ll need to weigh the pros and cons of doing your own taxes versus hiring a professional.
