A Beginner’s Guide to Being Proactive for Crypto Taxes
After the first of the year, there’s always a conversation about the upcoming tax season. Who are you using? What’s your tax plan? Do you have all the information you’ll need prepared? Crypto taxes? Wait, are there crypto taxes? How do I do those? Now there are even more questions about an entirely new set of taxes to be concerned with: cryptocurrency taxes. Let’s take a look at what information you’ll need to have at your side for the upcoming tax season and some strategies that you can start now to make things painless this time next year.
Crypto taxes are nothing to be afraid of, though many investors show little interest in preparing properly for them. In fact, one of the reasons the well-known exchange Coinbase was issued a subpoena from the Internal Revenue Service (IRS) was due to what happened in 2015 when only 802 people told the IRS about their crypto investments. The IRS is taking this type of tax evasion seriously now and it’s best to stay on top of things.
Here at CryptoLearningAcademy, we’re crypto experts—not licensed tax experts. Because of that, we’ll talk about some proper techniques for keeping clear records and easy to access information to use when you sit down with your tax professional(s) of choice. CryptoLearningAcademy and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
What is Crypto in the Eyes of the IRS?
Though many still think of cryptocurrencies as “currencies,” perhaps a much better title for crypto tax season is “crypto assets.” In 2014, the IRS officially designated crypto assets as “property” when it comes to taxes, via Notice 2014-21. This likely isn’t a big surprise for many in the cryptosphere now, but it was a big shift from where it was prior.
Additionally, a recent amendment to the once-used Like-Kind Exchange under IRC Code Section 1031 is no longer available. The update now changes the original text of “property” (which crypto assets are) to “real property” (which crypto assets are not). With this tax season, investors won’t be able to use the hoped-for loophole in paying taxes on crypto-to-crypto trades.
So where does that leave crypto assets? Cryptocurrencies are currently taxable property, like a capital asset.
What You Need to Know?
The most important change for crypto taxes coming is what is considered a taxable event. Now that cryptocurrencies have a new designation for tax purposes, trading now results in a lot of taxable events, especially if you trade cryptocurrencies a lot.
Because they’re no longer viewed as currencies by the IRS, a taxable event occurs whenever you trade one crypto asset for another or anytime a cryptocurrency is used to purchase a good or service (because they’re not treated as “currencies” by Uncle Sam, the purchase of that Lamborghini with BTC is still a taxable event).
But That’s Only When I Cashout Back to Fiat, Right?
No, no, and no. Unlike the way the few who did report crypto taxes in the past claimed their gains, taxes no longer apply only when cashing out back into US dollars.
It used to be the case that investors could spend $500 as an initial investment on Ether (ETH) up front, trade back and forth between BTC/ETH and other altcoins, and eventually end up with around $1,000 of ETH when they go to cash out and simply claim that $500 gain as a capital gain, but that’s no longer the case.
Now, investors will have to account for every transaction made, along with what the market value is for each asset at the point of each taxable event (any time you trade or sell that asset).
What Can I do to be Prepared Then?
Now that people are finishing up taxes for the 2017 year, the best option is to be properly prepared for 2018. In order to make things easier on yourself and your tax professional (it’s almost always recommended that investors seek professional help when dealing with large amounts of crypto assets) the key is going to be records.
Because cryptocurrencies are still a new, emerging asset class, the IRS doesn’t require any sort of third-party reporting by exchanges at this point. Luckily, exchange platforms know this information is still incredibly important for investors, so large exchanges like Coinbase and Binance provide extensive records of past trades for investors which can typically be found in one’s account information.
These records are going to be crucial when investors sit down with their tax professional, but things can go awry when assets are pulled out of the exchange and traded elsewhere. Documentation is key here. Hold on to all important information about where a trade happened, what the current price of the asset was, and relevant information for when the next time that asset was sold.
Can You Explain That to me Like I’m 5?
Say you buy a bitcoin (BTC) at $10,000 on an exchange and hold on to it. As it sits in your portfolio, the price fluctuates a lot. When it dips down to $8,200 and you’re still holding it: no taxable event (no realized loss). When the price jumps up to $20,000: no taxable event (no realized gains).
But if the price raises to $12,500 and you decide to cash out to fiat or use the increased value to purchase another asset like Ethereum (ETH), then it becomes a taxable event (you’ve realized a gain by $2,500). Similarly, if you decide to sell that BTC that you bought at $10,000 when it drops to $5,500 because of your “weak hands,” then you’ve also created another taxable event. In that case, it will be a realized loss of $4,500. It’s all about where you start and where you end, the tax man isn’t concerned with where the price fluctuates in the middle if it’s still sitting in your portfolio untouched.
There are some services already available on the market to help in record keeping. Some offer services specifically designed to help calculate taxes, others are simply portfolio tracking applications that require you to manually log all of your trades to keep them recorded. Interested investors can see some of big names in the market below. [Note: None of these links are affiliate links and CryptoLearningAcademy does not endorse one service over any others, listed or unlisted]