Cryptocurrencies Taxes Guide: How Bitcoin & IRS Reporting Works?
Tax season is right around the corner. That means, filing taxes, lots of paperwork and everything that makes us all dread the tax season. As if it’s not enough that you already have to deal with so much, you now need to worry about the role that cryptocurrencies play in your taxes.
For many people, the question often is, are cryptos taxable?
Should I include them when I’m filing my taxes?
Does the IRS even recognize cryptos as an investment or financial instrument, considering that even the SEC hasn’t really decided on what to make of it?
Well, the answer is yes, unfortunately.
You see, the IRS has determined that cryptocurrencies are in the same category as property. The document outlining this is the Notice 2014-21, which is accessible on the IRS website.
In summary, the document highlights the IRS’s recognition of cryptos as property and refers to it as a Convertible Virtual Currency. This means that it can be exchanged for FIAT currencies like the dollar.
What they didn’t highlight however, is how to go about filing the taxes for cryptos. It is assumed that the process will be in a manner similar to that of properties.
Whatever the case, the IRS considers every action involving the buying, selling and exchange of cryptocurrencies as taxable events. So, if you were to buy some Tether (USDT) with cash, that’s a taxable event.
If you exchange that for Ethereum (ETH), that’s another taxable event. However, if you move the Ethereum from the exchange e.g. Binance to your personal Myetherwallet, that’s not considered a taxable event.
Bottom line, any FIAT to Cryptocurrency or Cryptocurrency to Cryptocurrency exchange you make within a fiscal year, will be taxable. So, as long as it implied reward of some sort –whether you profit from it or not is moot- you will pay taxes on it.
However, if you hold it in keeping without selling or exchanging, you will not be taxed –this is even more so when you move from one of your wallets to another.
So, How Do You Determine How Much To Pay The IRS?
Well, since cryptocurrencies are taxed pretty much the same way as your property, assets, investments, stocks or bonds, you will need to factor in your capital gains and losses before paying the taxes.
This means that to determine the correct amount you need to pay, you’ll have to first determine the following:
- Date of initial cryptocurrency purchase or exchange
- The exact costs involved in the transaction (this also includes any costs, charges or fees accrued in the process; not just the cost of the cryptocurrency you purchased)
- Date of cryptocurrency exchange for cash or sale
- Exact price at which cryptocurrency was sold and total income/revenue from the sale (this also includes charges and fees)
While it’s true that tracking your trades might be somewhat overwhelming particularly if you do a lot of trading, the reality is this might be one of the best ways to protect yourself from the IRS.
The IRS will not accept negligence or ignorance as an excuse. So, you should actively seek to document all your trades. Also, there’s the added advantage of tax reports provided by certain exchanges.
These exchanges understand that there could be tax problems associated with their traders’ accounts. So, they have taken the initiative of making tax reports of their trades available on the exchange. Check your exchange to see if they offer such services –usually comes free of charge too.
How About Capital Gains and Losses For Taxes?
When it comes to cryptocurrency tax filings, there are different types of gains and losses. For the capital gains, there’s the
- Short term gains
- Long term gains
Short term gains are usually placed in the same category as income. So, whatever you make from your trades will most likely be subject to tax at your current tax bracket. Long term gains however, are taxed differently, and are usually lower than your short term capital gains. Long term capital gains often refer to the profits you make from “hodling” your cryptocurrency.
So, if you bought 10 ETH when it was priced at $7.95 in November 2016, and then stored it until December 2017, when it was valued at over $1,300, you will pay taxes on the profit made from holding the cryptocurrency. In this instance, that would be the $1,292.05 you made per ETH after subtracting the $7.95 from the $1,300.
Losses on the other hand is how much you lost from the investment. If, using the earlier example of 10 ETH, you bought at $1,300 in December 2017, and sold recently at $800, your capital losses would be valued at $500 per ETH.
You’ll need to report this too in your tax filing and deduct it from your taxes. Please note however, that you can only claim up to $3,000 in losses.
Also, with the Tax Cuts and Jobs Act kicking in this year, this might be the last time to claim tax losses on property –remember cryptocurrencies are categorized as property. So, if your ethereum wallet was hacked or you lost your cryptocurrency, this is the right time to claim those losses. You won’t get that opportunity in 2019.
Cryptocurrencies Taxes Guide Conclusion
If you had a great year with cryptocurrencies last year, chances are you might be tempted to completely skip the inclusion of your cryptocurrency gains and proceeds from your tax declarations and filings.
Well, we wouldn’t recommend that. The IRS is pretty serious about cryptocurrency proceeds tax as evidenced in their requisitioning of date from Coinbase. It’s only a matter of time before they do the same for all other popular exchanges. Once they do, you could potentially be in trouble.
It’s best to just file the taxes and be done with it. Better to be free and solvent so you can take advantage of the opportunities that 2018 will present, than be in jail because you omitted your crypto portfolio.