Do You Owe Taxes on Cryptocurrency?
It’s the million-dollar question that a number of crypto investors and crypto newbies alike have been wondering for the past several years. But, how does the IRS determine the amount owed in cryptocurrency taxes? By the end of 2018, crypto had a combined market cap of more than $600 billion, and people are continuously becoming more aggressive in their investing.
Many investors use the Coinbase platform.
With any investment comes tax questions. So if you use this platform or any other similar ones, read on to consider all you need to know about Coinbase tax reporting and crypto taxation as a whole.
1. The IRS’ Definition of Property
First things first, the answer to that million-dollar question – in most cases, yes, you will have to pay taxes on cryptocurrency.
Look no further than the IRS’ definition of property.
This definition is laid out in IRS Notice 2014-21. In this set of guidelines, it states that property extends to items purchased by way of digital currency.
Bitcoin is the most popular form of cryptocurrency today, but others, such as:
These and many more are all potentially taxable under the IRS’ definitions.
2. Taxable Cryptocurrency Transactions
All cryptocurrencies are taxable, but are all cryptocurrency transactions taxable?
There are a number of situations where taxation comes into play.
Examples of taxable cryptocurrency events:
1. Selling cryptocurrency for fiat currency (i.e. USD, CAD, EUR, JPY, etc.). This is treated as a capital gain, similar to if you sell shares of stocks that you owe
2. Trading cryptocurrency for other cryptocurrencies. Example: trading Litecoin (LTC) for Ripple (XRP)
3. Using cryptocurrency to buy goods or services
10 Examples of websites which accept cryptocurrency as payment:
Zynga (Mobile app/game site)
NewEgg.com (technology site)
Overstock.com (home goods site)
Roadway Moving (moving service. note: cold-wallet payments are not accepted)
CheapAir.com (travel site)
OKCupid.com (dating site)
OnLuxy.com (dating site)
Etsy.com (Note: not all Etsy sellers accept cryptocurrency as payment)
Shopify.com (Note: not all Etsy or Shopify sellers accept cryptocurrency as payment)
4. Receiving cryptocurrency as a result of a fork or from mining
What is not considered a taxable event:
1. Buying cryptocurrency with fiat currency (except in cases where the purchase price is lower than the fair market value of the purchased coin)
2. Donating cryptocurrency to a tax-exempt organization such as a church or non-profit organization
3. Gifting cryptocurrency (depending on the amount, it may trigger a gift tax)
4. Transferring cryptocurrency from one wallet to another (that you own)
You will need to use a capital gains and losses calculator in order to get a clear picture of how much you’ll be taxed on this transaction. If you came out ahead, you’ll need to use a specific form to report a capital gain.
Second, you’ll also have to pay taxes on goods and services that you pay for using cryptocurrency. In the same way you’d owe a bit extra in taxes on your Chinese food order using cash, you’ll need to account for taxes when you use Bitcoin or another currency.
In terms of employment, you’ll need to pay taxes on money that you pay your employees in crypto, in addition to any crypto payments you received as an employee. This means filling out your W-2 accordingly and making sure that you convert the crypto transactions to United States Dollars.
There are a series of other circumstances in which taxation on your cryptocurrency will come into play.
For instance, you’ll need to pay taxes for exchanging Bitcoin for other types of coins, such as Litecoin or Ethereum. You’ll also need to pay taxes for cryptocurrency that you’ve personally mined, and those held long-term as capital assets.
You’ll need to go through these sorts of transactions with a fine-toothed comb so that you’re always in the loop and handling your taxes properly.
3. Account For How Much You Owe in Taxes
Once you figure out which transactions are taxable, it’s time to get a proper accounting of how much money you owe.
After you learn how much you earned in capital gains, you’ll want to assess whether it constitutes a short-term gain or a long-term gain. It’s considered short-term if you held onto the crypto shares for up to a year, and long-term if it’s any timetable longer than that.
You’re subject to different tax rates based both on whether it was a short-term or long-term gain and the overall tax bracket that you fall into based on your earnings.
For instance, the 0% threshold is for people who earn about $40,000 or less. Your tax rate is 15% if you more than approximately $40,000 and less than about $435,000.
Further, you will pay 20% in cryptocurrency taxes if your income is more than approximately $435,000.
Things can get tricky if you’re figuring out how much you owe in taxes for purchases. For instance, purchasing a meal that was paid for in cryptocurrency requires you to first and foremost determine the base price.
Doing so requires you to keep your receipt and go through each transaction for a better idea of what you paid and whether or not taxes were included.
Further, make sure that your records are as accurate as possible for any mining that you do. Once you successfully mine a Bitcoin or other crypto token, it’s subject to taxes by the IRS, and you will need to provide documentation of it.
4. Make Note of the Various Types of Cryptocurrency You Hold
The beauty of Coinbase is that it allows you to hold a number of cryptocurrency types in your wallet. By managing your wallet, you’ll have a clear idea of the value you have invested in each type of cryptocurrency.
When it’s tax time, be sure that you mull through both Coinbase and any other wallets where crypto is held so that you aren’t overlooking any assets.
5. Be Sure Every Trade is Worth Your Time
Cryptocurrency is still young, and you’ll need to constantly learn how changes affect your virtual currency taxation.
For instance, Litecoin issued a hard fork with Litecoin Cash in February, and this has given rise to a number of options for traders. However, it’s still unclear how the IRS handles hard forks, so you’ll need to get some guidance on the matter, or figure out whether Litecoin Cash trades make sense to you.
Each new transaction comes with its own set of tax circumstances that you need to be made abreast of, so always do your due diligence.
6. Don’t Wait For the IRS to Notify You
It’s important that you fill out your forms and address your own taxes, rather than waiting for the IRS to notify you of taxes due.
When you fail to address your capital gains tax by April 15, you leave yourself open to late payment fees. This just compounds your taxes and brings about confusion or even tax audits.
The more organized you are overall, the easier it’ll be for you to avoid unnecessary tax penalties.
7. The IRS is Shifting Its Attention to Cryptocurrency
You will need to be particularly mindful of handling your taxes since the IRS is now aggressively seeking out cases of people attempting to evade cryptocurrency taxes.
An alarming number of people aren’t paying taxes on their cryptocurrency investments, and cryptocurrency’s entire beginning was based on privacy from the government and financial institutions.
As such, you are currently more likely to draw the ire of the IRS over crypto-related tax evasion than other mistakes or oversights. Remain upfront and transparent about your taxes so that you don’t have to contend with this level of pressure.
8. Some Questions Remain
Though the IRS is clear that cryptocurrency is considered taxable property, there are still several kinks in the process that need to be worked out, and questions still remain.
For example, we’re still not sure where the IRS stands on international tax reporting for cryptocurrency. There’s also still not an entirely uniform process of determining fair value for your cryptocurrency trades.
What is very clear is that cryptocurrency is here to stay, so these and other matters will be continuously addressed as time goes on.
9. Each Country Addresses Cryptocurrency Taxes Differently
Keep in mind that these guidelines refer to the tax burden that you’re subject to in the United States.
Each country has its own set of parameters when addressing crypto taxes. Britain, for instance, also charges taxes for capital gains, but has a crypto-pool rule that equates to the average price you paid for previous coins that you bought.
These sorts of things are important to note because as the cryptocurrency landscape becomes more clear, countries are taking note of how others are addressing cryptocurrency taxes as they put their own laws and policies into play.
10. Learn Which Transactions Are Tax-Free
There are plenty of deductions that you can seek when paying your cryptocurrency taxes.
For instance, many charitable organizations are now accepting cryptocurrency donations. With this in mind, you’re able to write off a portion of your income based on crypto donations you made to non-profit organizations.
There are also new pass-through deduction standards that will dictate how you make adjustments.
Keep this sort of information in mind so that you can potentially lower your tax bill.
Be Prepared For Tax Time
Knowing is one thing, but you’ll need to apply this knowledge as you put together your own cryptocurrency taxes. Consider the following points:
1. Keep Accurate Documentation Throughout the Year
You’ll save yourself worlds of trouble when you can provide documentation for all of your transactions. Having a Coinbase account is half the battle because this platform lets you generate a variety of custom reports that would otherwise be difficult to obtain.
Coinbase also offers 1099-K forms that you can use to account for your cryptocurrency transactions. Get these documents as early in your tax process as possible to be sure that you are staying ahead of the game.
You can even keep an IRS form 8949 – Sales and Other Dispositions of Capital Assets handy and fill out line-by-line as you buy and sell different types of cryptocurrency.
Coinbase also has a built-in capital gains and losses calculator that you can use to make sure that you’re as accurate as possible about each transaction.
2. Reach Out to a Tax Professional For Further Assistance
Another sure-fire way to minimize any tax confusion with cryptocurrency taxes and reporting to the IRS properly so that you don’t get audited is by reaching out to professionals.
Having an accountant all year gives you more thorough service than you’d get hurriedly hiring a tax professional once taxes are due. When you have access to an accountant throughout the year, they can help you out with questions that you have regarding any crypto transactions.
This also helps you to guide your strategies and have more clarity about the tax implications before you make any mistakes.
3. Set Aside Money in a Tax Savings Account
Be sure that each time you cash out cryptocurrency or complete other such transactions, you put aside a percentage of money in a dedicated tax savings account.
One of the best ways to save for your taxes is to put your tax money in an online account that you can’t get to right away. This curbs the temptation to dip into the tax money.
Even better, many of these accounts get higher interest yields than you would get simply putting the money in a brick and mortar bank. In addition to transferring the money into the account, always have the exact amounts earmarked to be sure you are saving enough.
4. Don’t File Late
The absolute most important thing is to always file your taxes properly and on time.
When you ensure proper accounting of your taxes and get them on the record, you will be less likely to draw suspicion of any cryptocurrency transactions. It will allow you to satisfy the government’s requirements and also avoid audits.
You should also consult and stay up to date with your state’s tax requirements, specifically regarding cryptocurrency taxes. Seek deductions and write-offs whenever possible, and keep records of your tax filings from year to year.
Follow These Cryptocurrency Tax Reporting Tips
As you can see, reporting cryptocurrency taxes involves a number of variables. If you own any type of virtual currency, you do indeed owe taxes on cryptocurrency, and the specifics above can help you get started.
The landscape of finance has shifted completely, due in large part to the advent and growing popularity of cryptocurrency. Crypto is here to stay, so use the tips above to address your taxes on these transactions.
Take it a step further and get help from tax professionals that can assist you if you are in a bind. Our tax attorneys would be more than happy to help.
When you need assistance, contact us to speak to a tax attorney who understands reporting on virtual currency today!