Tax season is upon us, and millions of Americans are learning for the first time that their cryptocurrency investments may be taxable just like any other investments and income they’ve generated.
Believe it or not, this wasn’t always the case.
For years and years, Bitcoin investors were able to sort of float beneath the radar of the IRS. This digital currency wasn’t considered a currency at all by the US government. It wasn’t even really considered an investment, either.
As soon as Bitcoin stopped being worth fractional cents and instead thousands and later tens of thousands of dollars, though, the IRS changed their tune.
In 2017, the IRS compelled one of the most popular cryptocurrency platforms and wallets on the planet – Coinbase – to turn over data on their customers that bought or sold more than $20,000 worth of Bitcoin between the years of 2013 and 2015.
Ever since, the IRS has been taking the taxation of cryptocurrency (not just Bitcoin, but other crypto options as well) very seriously.
If you are serious about crypto investing, you definitely want to make sure that you aren’t running afoul of the taxman moving forward.
Here are some cryptocurrency tax preparation tips and tricks you’ll want to keep in mind.
Crypto Investment Bookkeeping is Your Responsibility
With literally hundreds of different brokers, wallets, and exchanges already in the crypto world today (and who knows how many on the horizon), the decentralized nature of cryptocurrency makes record-keeping a little more challenging than with traditional investments.
And while that can be a big bonus for folks that want to shelter their money, it can also be a huge risk should the IRS come calling.
According to the IRS, every Bitcoin transaction – every time you bought or sold Bitcoin – you may be liable for paying taxes on the dollar equivalent value. This is what makes tax liabilities with crypto so challenging, especially since the IRS puts the onus on end-users for proving how much their crypto was worth whenever a transaction occurred.
If you aren’t able to prove that you really purchased and sold crypto at lower prices (lessening your tax burden) you run the risk of your crypto assets being appraised at their current value, which can be exponentially higher.
Keep tight records no matter what.
Taxable Crypto Transactions
Because crypto is so new, and because it is so different from fiat currency, trying to figure out how crypto is taxed is usually a bit of an ever evolving process.
According to the folks at the IRS, anytime Bitcoin (or any other crypto) is received as payment for goods or services the “holding period” doesn’t matter at all.
That crypto should be taxed as income on the dollar equivalent of the crypto at that time, and will usually be taxed at anywhere between 10% and 37% (depending on marginal rates).
State taxes may even be applicable, too!
Crypto that is “mined” is also considered to be income, though this income is generally taxed at the self-employed rate. That can throw a real monkey wrench in figuring out your tax liability, particularly if you are traditionally a W-2 employee.
Crypto that is purchased and sold at a profit as an investment should be treated as income depending on the holding timeline. If the crypto was held for less than a year, the net receipts would be treated as regular income. If held for more than a year, though, capital gains taxes kick in.
The reverse is true as well, though. If you purchased crypto and sold it at a loss you’ll be able to write that off on your taxes, too.
How to Safely Report Your Crypto Holdings During Tax Time
At the end of the day, the safest way to report your crypto holdings during tax time is to speak with an accountant and CPA that actually specializes in the crypto world.
This is (even for the IRS) still relatively new and uncharted waters.
The landscape of crypto taxation changes on a regular basis and you’ll want to be sure that you are in full compliance with the latest laws, rules, and regulations.
Unless you want to try and track these changes alongside keeping an eye on the ever-changing world of crypto in general, it’s a good idea to hand this kind of work off to legitimate tax professionals that are professionals in the cryptocurrency arena.
Customized Crypto Tax Planning
We’d love to sit down and talk about your tax situation and how you can protect as much of your income as possible – legally, ethically, and responsibly.
If you’d like personalized help for navigating the often confusing tax situation post-coronavirus, please don’t hesitate Robert Hall & Associates at your earliest convenience via the webform here, by phone at 818-242-4888 or reach me directly via email at [email protected].