The IRS opened their e-filing on January 28th and many people are now filing their taxes.
While the new tax laws have changed a few things this year, most rules regarding cryptocurrencies have remained the same.
If you are new to including cryptocurrency in your tax returns, or just could do with a refresher, here are 10 useful pieces of information.
1. Profits from cryptocurrencies are capital gains
A tax event occurs whenever you dispose of any cryptocurrency. For each event, you have to calculate if you made or lost any money. These are declared as capital gains/losses (Schedule D) on your tax forms.
- selling crypto for fiat currency, e.g. trading it on an exchange for dollars
- trading one crypto for another, e.g. buying ETH with BTC, as you are disposing of the BTC
- spending crypto, e.g. buying a gift card
If you didn't receive a dollar amount, such as when selling for USD, then you would use the fair market value of the crypto at the time. This might be how much it was worth, or the value of the item you are acquiring. For example, if you buy a $100 gift card, then the fair market value of the BTC you are spending is $100.
It also doesn't matter if you traded and never withdrew the USD to your bank, or received crypto to your own wallet. If the account is under your control and you would have access to the received funds, then it needs to be declared. It also doesn't matter if it is a US or foreign exchange. For US taxpayers, all activity must be included.
2. Long-term gains have discounted tax rates
If you sell or spend your crypto that was owned for more than a year, it can be classed as long-term and any gains made will have discounted tax rates. The rate depends on your other income, but can be 15% or even 0% for lower income taxpayers. There is a 20% rate for high income earners.
You will need to keep records in case you are even asked to prove you owned them for longer than a year.
3. Losses can be offset against income to reduce taxes
To calculate your total capital gains, your short-term gains and losses are combined. Then any long-term gains and losses are combined. Finally, these totals are combined into a net gain or loss.
If you have a net loss, you can use it to deduct up to $3,000 against your normal taxable income, for example, saving $720 in taxes with a 24% tax rate.
Any remaining losses are carried forward to next year. They can again be used to reduce capital gains from that year as well as another $3,000 against income. This continues forever until you have used up all the losses.
4. Like-kind exchanges
Trading between cryptocurrencies is a tax event and you cannot use a 1031 like-kind exchange.
The new tax law in 2018 has changed the wording to:
No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.
While some people reported using like-kind exchanges for 2017 and earlier, it definitely cannot be used for this tax year and onward.
5. Record forks, splits and airdrops
Any crypto you receive is treated as income on the day it was received. The dollar value is its fair price or market value.
While some crypto may have an established price, often, there is no market or known price. In this case, you should still add the crypto as Income, but for zero value.
This is needed for when they are eventually sold or traded, as you will use the date and amount from when they were acquired to work out the appropriate gains.
6. Being paid in cryptocurrency should be reported as if you received dollars
If you are paid with crypto, you should report the income as if you were paid in dollars. If you were paid by an employer, it is likely the figures have already been included in your W2 and there is nothing else you need to do.
But if you received crypto from self-employed, or other work, then you need to report the fair value as your income. For example, if you did some work that you would normally have been paid $1,000, but instead you received crypto, then you report $1,000 as income in your taxes. If you just received some crypto with no equivalent dollar value, then you must use the fair or market price of those crypto on the day you received them.
7. Tips/gifts aren't taxable
If you were tipped, as long as it was not for any provided product or service (i.e. you didn't earn it), then it is gift and does not need to reported and is not due income taxes.
However, if you were tipped or gifted crypto that you subsequently sell or trade, you will incur capital gains.
If you were given the cost basis along with those gifts, you can use this information to reduce any gains when you come to sell them. However, you cannot take losses from the basis of these coins, but instead have to use the market value on the date you received the gift.
8. Transfers do not have to be reported (but fees might)
When you transfer any crypto between various wallets or exchange accounts that you own, you do not need to report or pay any tax on those amounts.
However, you might need to report any fees associated with the transfer, either mining or withdrawal fees. These are disposals, where you are paying for a service, and so should be included as Spending even though the tax amount is likely negligible.
If you were transferring your crypto to an exchange to sell, you could add this to its basis, or deduct it from the proceeds you receive.
Any fees included for spending from a wallet should be included as part of the fair market value. For example, if you are spending 0.01 BTC on something worth $36 but have to include a mining 0.001 fee, you should record this as spending 0.011 BTC for $36.
9. Identify lost, stolen or fraudulent activity
Prior to 2018, stolen property could be claimed as a deduction by reporting it as a casualty loss (subject to certain amounts). This deduction has been removed and now is only available for presidential declared disasters.
While lost crypto could never have been claimed, as accidents or negligence are not tax deduction, losing crypto because of fraudulent activity could instead be seen as a capital loss. For example, if the crypto had become worthless or you are no longer able to access it.
Each situation is different and you should check with your tax professional to decide how to report any lost crypto due to fraudulent activity.
10. Keep records
You should keep records of all your crypto activity in case you are ever audited or required to show documentation relating to your tax returns. For example, you might be required to prove the long-term gains you declared were owned for more than a year.
The burden is always on you to keep documentation and perform record-keeping.
Recently, we have seen exchanges go offline and users have no access to their historical records, or even funds. You should access your accounts and download your data as frequently as needed.
- Keep records of all your cryptocurrency activity.
- Periodically download your trading history from any exchanges you use.
- Export transaction logs from any wallets you have.
- Ensure you have records for each time you spend any crypto.
This post is for informational purposes only and not intended as tax or financial advice. Please speak with your own tax professional on how you should treat the taxation of your own cryptocurrencies given you own circumstances.
Bitcoin.Tax is the leading capital gains and income tax calculator for Bitcoin and cryptocurrencies. You can sign up for free at https://bitcoin.tax/signup.