6 Important Things to Know About Cryptocurrency Taxes

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(Newswire.net — January 11, 2020) — Cryptocurrency tax regulations are subject to different tax rules depending on your jurisdiction. The questions below address implications within the United States, but similar issues arise around the world. 

1. How do cryptocurrency taxes work?

As per the IRS guidance, that cryptocurrencies like bitcoin should be treated as a form of property for tax purposes—not as currency. Just like other forms of property like stocks, bonds, real-estate, etc., you incur capital gains and capital losses when selling, trading, or disposing of your cryptocurrency. These gains and losses need to be reported on your tax return. 

For example, if you purchased 0.1 Bitcoin for $1,000 in April of 2018 and then sold it two months later for $2,000, you have a $1,000 capital gain. You report this gain on your tax return, and depending on what tax bracket you fall under, you will pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain. This applies for all cryptocurrencies. Canada’s crypto tax rules vary slightly.

2. Do I need to report my cryptocurrency trades on my taxes?

If your trade resulted in a taxable event, yes. Similar to trading stocks, cryptocurrency trading results in capital gains or losses income which need to be reported. Whenever you trigger a ‘taxable event’, you must recognize any capital gains or losses on the sale. 

3. What is a taxable event?

A taxable event is simply a specific action that triggers a tax reporting liability. In other words, whenever one of these ‘taxable events’ happens, you trigger a capital gain or capital loss that needs to be reported on your tax return.

The following have been taken from the official IRS guidance from 2014 as to what is considered a taxable event in the world of crypto. If any of the below scenarios apply to you, you have a tax reporting requirement.

  • Trading cryptocurrency to fiat currency like the U.S. dollar is a taxable event.
  • Trading cryptocurrency to cryptocurrency is a taxable event (you have to calculate the fair market value in USD at the time of the trade).
  • Using cryptocurrency for goods and services is a taxable event (again, you have to calculate the fair market value in USD at the time of the trade).

4. If I lost money and have capital losses, can those be written off to reduce my tax liability?

Yes! Just like if you were to lose money when trading stocks, capital losses from your cryptocurrency transactions deduct from your capital gains and income. In effect, they reduce your taxable income and put money back in your pocket! 

5. How do I report my cryptocurrency gains and losses on my taxes?

You need to complete IRS Form 8949 detailing your cryptocurrency taxable events and include this with your tax return. 

On Form 8949, list all cryptocurrency trades and sells along with the date you acquired the crypto, the date sold or traded, your proceeds (Fair Market Value), your cost basis, and your gain or loss. Once you have each trade listed, total them up at the bottom, and transfer this amount to your 1040 Schedule D. Include both of these forms with your yearly tax return. 

Bitcoin tax software can automatically build these tax reports for you. Historical prices, dates, and fair market values for all of your trades and transactions will be retrieved automatically by the software.

6. Why can’t my cryptocurrency exchanges provide me with tax documents?

Cryptocurrency exchanges are unable to provide their users with accurate tax documentation. This is a big problem in the industry.

By nature of the blockchain technology that exchanges operate on, users are able to send Bitcoin and other cryptocurrencies from one wallet to another, irrespective of the original exchange or platform. An example of this would look like you buying Bitcoin through Coinbase and then sending it to a Binance wallet address to acquire new coins and assets.

Because you can send cryptocurrencies from other platforms onto exchanges like Coinbase at any time, Coinbase has no possible way of knowing how, when, where or at what cost you acquired that cryptocurrency that you sent in. Coinbase only sees that it showed up in your Coinbase wallet.

This means that anytime you move crypto assets off of, or onto, an exchange like Coinbase from another location, Coinbase completely loses the ability to provide you with tax information that you need for capital gains and losses reporting. This is because the exchange has no way of identifying what your cost basis is in that certain cryptocurrency, which is an essential piece to figure out your capital gain or loss. This is true of all other major cryptocurrency exchanges. 

The solution to this problem is to aggregate all of your cryptocurrency data across all of the platforms you use so that you can then build your holistic tax reports. 

David Kemmerer is the Co-Founder and CEO of CryptoTrader.Tax, cryptocurrency tax software for automating your tax reporting.