Five Things You Need to Know About Your Crypto TaxesJan 15, 2020, 8:38PM
The five top questions to ask when determining your obligations regarding your crypto assets when you file your taxes this year.
1. How does the IRS tax cryptocurrencies?
Don’t be misled by the “currency” in cryptocurrency. According to IRS guidance, in the US cryptocurrencies are taxed as property, not as currency. There are many implications that traders need to be aware of because of this distinction. The easiest way to think of it is to compare cryptocurrencies to other assets such as stocks, bonds, and real estate, which are taxed on capital gains or capital losses. Investors are taxed on gains they made from buying or selling, or their losses can be used to offset their gains or income.
A key difference between cryptocurrency and these other forms of property is that trading one cryptocurrency for another is also considered a taxable event, and any gains or losses made on that trade need to be reported. Many traders might think that if they didn’t cash out for fiat currency then they don’t need to worry, but in order to remain tax compliant, they do.
Here’s an example: if you purchased 0.1 Bitcoin for $1,000 in March 2018 and then sold it for $2,000 you would have a tax liability for the $1,000 capital gain that you incurred. However, if instead you chose to trade that Bitcoin for ETH and incurred a capital loss of $500 that loss would also need to be reported.
2. If I lost money on crypto do I still have to report that for my taxes?
Yes, whether you have a gain or a loss, every time you buy, sell, or trade cryptocurrency this is considered a taxable event according to official IRS guidance from 2014. Those losses need to be reported. The good news is that those losses can be used to offset your capital gains or income.
We all know that Bitcoin dropped significantly between summer 2019 and December and many investors and traders have been hit hard. If you’re one of them, you can turn this situation to your advantage by deducting those losses from your capital gains and income. These implications vary slightly for other countries—like Canada’s crypto tax policies.
3. What if I forgot to pay my crypto taxes last year?
Depending on your situation, you may want to consider amending a previous tax return as the IRS can back up to three years to investigate tax evasion, and if they find significant errors they can prosecute as far back as six years. The most important thing you will need to calculate your tax liability from previous years is the Fair Market Value of your cryptocurrency at the time of every trade.
Unless you have been painstakingly keeping track of the Fair Market Value for all your trades, the best method would be to use a crypto tax software that can automate the process of tracking down historical pricing data for all your trades. With that data you can fill out the IRS Form 1040X.
4. What do I need to report my cryptocurrency taxes for 2019?
You need to file the IRS Form 8949 which uses a detailed record of all your crypto taxable events to establish your capital gains or losses for 2019.
The Form 8949 will list all your crypto trades and sells. For each crypto traded or sold you will need to provide the date and amount in USD (cost basis) for when it was first acquired, the date it was traded or sold, the proceeds in USD (Fair Market Value). With the Cost Basis and Fair Market value establish for each trade, you can then calculate your gain or loss. Once you have calculated your gains and losses for all trades in 2019, you will transfer the amount of your gains/losses to the 1040 Schedule. Both of these forms need to be filed for your 2019 taxes.
Again, this is where crypto tax calculating software can be critically helpful for tracking all the historical prices and dates for each trade. After retrieving this information the software can generate a complete and accurate report of the Form 8949.
5. Why can’t I get these documents from my exchange?
If you have traded across multiple exchanges then your cryptocurrency exchanges do not have the ability to give you accurate tax information in order to fill out the Form 8949.
Here’s why: when you send crypto from one exchange to another the two exchanges do not maintain a shared record of the date and original price (Cost Basis) for when you acquired the crypto. For example if you acquired Bitcoin on Coinbase and then sent it to Binance where you traded that Bitcoin for Ethereum, each exchange has only half of the data to establish your gain or loss on that trade. Coinbase has your Cost Basis and Binance has the Fair Market Value and they do not share that information with each other.
The impetus is therefore on the taxpayer to keep track of the historical price in USD for when they initially acquired the crypto and the eventual price in USD when they dispose of that crypto. When we consider tracking that information across years of trading, many different exchanges, and thousands of trades, the task of accurately reporting your tax liability can seem like a real headache.
This is where tax software that automatically aggregates this information can be a great solution for addressing this fundamental cryptocurrency tax problem.
Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.