It is inevitable that cryptocurrency markets are currently all over the place. More than 6700 cryptocurrencies are traded publicly today. We now read about them in the front pages of daily websites or financial publications. Well, it is tax season and if you mined, purchased or sold any cryptocurrencies this past year, you should know that Uncle Sam is waiting for his share.
Last year, for the first time, federal tax forms asked about your cryptocurrency activities. So here is a quick recap of cryptocurrency implications on your taxes:
To start, if you have been using cryptocurrency but not filing for your taxes on them, know that you are not compliant with the IRS which means unless you could provide some “reasonable cause” you might get penalized. According to IRS Notice 2014-21, the IRS classifies cryptocurrencies as property, not cash or currency.
So how do cryptocurrencies get taxed?
The way your transactions get taxed depends on whether the gain or loss you have incurred of the currency is a capital asset or an ordinary asset in your hands. Capital assets are generally properties that are not used in trade or business of the taxpayer. On the other hand, ordinary assets are properties used in trade or business or primarily held for sale by the taxpayer. For example, if you sell a stock, a piece of art, an investment property, or another capital asset and earn money on the sale, you realize a capital gain and you would need to pay capital gains tax on it. However, if your transactions are a part of business reasons, mainly for sale to customers in a trade or business, your gains or losses would be considered as ordinary assets and you would need to pay ordinary income taxes on them. Same treatment goes for your gains or losses from your cryptocurrency transactions. In another case, let’s say you’ve received virtual currency from your employer, then it’s treated the same way as wages. How you will be taxed depends on the intent and character of your transactions.
How to prepare and file your cryptocurrency taxes?
It is crucial to keep a detailed track of all your cryptocurrency transactions. You can typically pull the information you need through your cryptocurrency exchange platform. For each transaction you need to know:
- The amount you spent to buy the cryptocurrency (in USD)
- The date you purchased (or received) them
- The date you sold or exchanged the coins
- The amount in dollars the cryptocurrency was worth when you sold it (or value you received in the exchange)
Once you gather all the information you need, the two very important things you need to pay attention to are the method you choose to calculate your gains or losses and your holding periods.
- Deciding which method of calculation to choose is important as it will greatly affect your gains or losses. FIFO method’s advantage would depend on whether the market is a bear market or a bull, and your initial costs of acquiring the cryptocurrencies. With the IRS’ latest guidance issued, now, If you want a method that allows you to better manage your gain or loss and optimize your taxes, you may also choose the specific identification method.
- For capital gain transactions, when you buy and then sell or exchange a crypto asset within one year, your gains are considered short-term gains and are subject to your ordinary income tax rate — that’s the rate you pay on your income. This rate can go up to 37%. Cryptocurrencies you buy and then sell or exchange after holding it for a year or longer are long-term transactions and are subject to the capital gains rate which cap out at 20%.
Tracking transactions at such detailed level might be hard to keep up with. Well, that is why we are here for you. We, at Manay CPA specialize in all kinds of tax issues including cryptocurrency tax reporting. Call us today at 404-900-1040 to schedule a free consultation. We are here to improve your financial health and provide you with the best solutions for you.