fox and associates, inc.
Intro to Crypto-Currency Reporting and Taxation *
Intro to Crypto-Currency Reporting and Taxation *
Unless you live in Italy or another similar country where cryptocurrency gains aren’t taxed at the moment, you’ll soon be trying to figure out how to properly account for your bitcoin or other cryptocurrency holdings ahead of the upcoming tax season and beyond.
Generally, ambiguity reigns presently, as cryptocurrency taxation is very much a work-in-progress for legislative bodies across the entire world. Nevertheless, as current cryptocurrency users, we must contend with the laws of our respective lands as they stand now, lest we commit tax offenses and cause major headaches for ourselves down the road.
In the United States, in 2014, the Internal Revenue Service established an official cryptocurrency tax policy, and have been revamping and refining its rules ever since. The (IRS) considers cryptocurrencies to be “property” or a “Capital Asset” in the hands of MOST taxpayers. As a “consequence” of cryptocurrency’s tax classification as “property”, every single exchange of altcoins is a taxable and reportable transaction. This includes exchanges for altcoins for cash, goods or services, and even exchanges into other types of cryptocurrency. It is immaterial if the transaction involved fiat or not. If an exchange occurred, then a taxable transaction has occurred. If the taxpayer gave up altcoin and received something other than the same type of altcoin in return, it must be reported.
Gains are calculated by taking the “amount realized” in each transaction and subtracting the “cost basis” of the altcoins given up. If the amount realized was greater than the cost basis, there is a gain. If it was not, then there is a loss. The total amount of gains and losses are then netted against each other to determine the net gain or loss for the year.
Cost Basis: “Cost basis” is the original value of an asset for tax purposes, and is usually equal to the purchase price of the property given up in a transaction. In the case of cryptocurrency, tracking cost basis gets difficult if the altcoins were purchased at different times and at different amounts. The default system (and the one generally preferred by the IRS) is to assume that the altcoins are sold in the order they were acquired. Thus, the first altcoins purchased are assumed to be the first ones sold. This is called the FIFO method (“First in, First Out”). There are some other methods available, such as LIFO (“Last In, First Out”) and Average Cost Basis, but it’s not clear if cryptocurrency is eligible for these alternatives.
Amount Realized: In the case of a sale, amount realized is equal to sales price, reduced by any selling costs incurred in the transaction (like commissions or wire transfer fees). In the case of an exchange of altcoins for goods or services, then the amount realized is the value of the goods or services received in the exchange. In most cases, this would be the price of the goods/services as denominated in fiat currency.
Generally speaking, reporting capital gains from the sale/exchange of cryptocurrency is the same as other types of capital assets (such as shares of stocks). So, net short-term and long-term capital gains are reported on Schedule D of Form 1040. The individual transactions themselves are reported on Form 8949. If there is a high volume of transactions, they can be reported on a separate statement and attached to Form 8949 instead. Note that each and every individual transaction must be reported on Form 8949 or an attached statement.
If you cash out or exchange your crypto within one year of buying it, then you’ll be hit with the steeper short-term capital gains tax. These short-term rates are typically whatever your regular tax rate is, so if you’re taxed at 25%, then your short-term gains be taxed at the same rate as well.
For U.S. users who exchange or cash their crypto out after one year of holding it, they’ll contend with the long-term capital gains tax rates of 0%, 15%, and 20% depending on their tax bracket.
There was some debate about whether Crypto to Crypto trades would be treated as “like-kind”, meaning no tax would be due on these. This has now been clarified and tax is due, so you will need to keep records of any trades you make and pay tax accordingly. Therefore, US taxpayers must calculate the amount of their gain or loss on every single transaction involving bitcoin. This is highly burdensome and threatens the widespread adoption of bitcoin (or virtual currency in general) as a viable medium of exchange.
*This information does not constitute legal advice and you should not act upon the information provided above without obtaining specific advice from a qualified specialist. No representation or warranty is given as to the accuracy or completeness of the information provided above, and we do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on this information for any decision based on it without our knowledge.