Eight Must-Read Questions About Cryptocurrency Taxes

October 31, 2019 / by David Kemmerer

Depending on what country you live in, your cryptocurrency will be subject to different tax rules. The questions below address implications within the United States, but similar issues arise around the world. As always, check with a local tax professional to assess your own particular tax situation.

For the first time since 2014, the IRS has issued new cryptocurrency tax guidance in the form of a complete cryptocurrency FAQ and an official Revenue Ruling: 2019-24. Below are some of the most commonly asked questions about cryptocurrency taxation.

Are Cryptocurrency Trades Taxable?

Yes. Cryptocurrency is treated as property by the IRS in the United States. This means that it is subject to capital gains and losses rules similar to other forms of property like stocks, bonds, real estate, and gold.

In this sense, cryptocurrency trading looks similar to trading stocks for tax purposes.

For example, if you purchased 0.2 Bitcoin for $2,000 in April of 2018 and then sold it two months later for $4,000, you have a $2,000 capital gain. You report this gain on your tax return, and depending on what tax bracket you fall under, you will pay a certain percentage of tax on the gain. Rates fluctuate based on your tax bracket as well as depending on whether it was a short term vs. a long term gain. 

When Do I Owe Taxes on My Cryptocurrency?

The following examples have been taken from the official IRS guidance as to what is considered a “taxable event” for cryptocurrency. A taxable event is simply a term describing the circumstances in which you incur a tax liability that you must report.

  • Trading cryptocurrency to fiat currency like the U.S. dollar is a taxable event.
  • Trading cryptocurrency to cryptocurrency is a taxable event (you have to calculate the fair market value in USD at the time of the trade).
  • Using cryptocurrency for goods and services is a taxable event 
  • Giving cryptocurrency as a gift is not a taxable event (the recipient inherits the cost basis; the gift tax still applies if you exceed the gift tax exemption amount).
  • A wallet-to-wallet transfer is not a taxable event 
  • Buying cryptocurrency with USD is not a taxable event

How Do I Calculate My Gains and Losses From My Crypto Trades?

To calculate your capital gains and losses on your crypto trades, apply this formula:

Fair Market Value – Cost Basis = Capital Gain / Loss

Fair market value is simply how much an asset would sell for on the open market. Again, with cryptocurrency, this fair market value is how much the coin was worth in terms of U.S. dollars at the time of the sale.

Cost basis is the original value of an asset for tax purposes. In the world of crypto, your cost basis is essentially how much it cost you to acquire the coin. 

For example:

Let’s say you bought 5 ETH in January of 2018. You paid $2,000 for these ETH ($400 for each coin). After the market took a turn for the worse, you sold 3 of these ETH in July for $150 each.

In this example, your cost basis for the 3 ETH that you sold is $1,200 (3 * $400). You sold the coins for $450 total. This is your fair market value.

Doing the math: $450 – $1,200 = -$750.

You incurred a $750 capital loss. You would file this loss on your taxes, and it would reduce your tax bill. You would not owe taxes on the 2 ETH that you are still holding because you haven’t disposed of them yet.

Keep in mind, coin-to-coin trades are considered both a “buy” and a “sell” for tax purposes. You can also use a cryptocurrency tax calculator to automate the entire reporting process.

Can I Save Money on My Taxes if I Lost Money Trading?

Yes. If you realized losses throughout the year from trading crypto, these losses can and should be used to offset other capital gains as well as up to $3,000 in ordinary income. Keep in mind, you need to “realize” these gains to be able to write them off on your taxes.. 

I received a 1099-K from Coinbase, Gemini or another exchange. What do I do?

A 1099-K is a form that reports credit card transactions and third-party network payments that you have received during the year. It is not an “entry” document, meaning you don’t need to attach or “include” it with your tax return.

1099-Ks from exchanges like Coinbase report the total dollar amount of transactions that occurred from your account. This number can be very large and not at all representative of how much money you put into Coinbase nor how much money you owe in taxes. The IRS is aware of this. Tax documents from exchanges like Coinbase will also be completely inaccurate if you ever moved crypto into other wallets, exchanges or other platforms differing from the one that sent you the 1099-K. Inaccurate coinbase tax forms are commonly seen amongst traders.

In order to properly report your crypto taxes, you need to capture your holistic crypto activity across all exchanges and platforms and complete a 8949 Form

Will I Be Audited if I Don’t Report my Cryptocurrency Gains and Losses?

No one can answer this question for certain. Audits do not happen very often for average citizens; however, as noted above, the IRS has explicitly stated that the taxation of virtual currencies is one of its core campaigns and focuses for the year. Staying on the right side of the law and avoiding tax fraud is a safe way to go.

Thankfully it is not that difficult properly to report your crypto tax liability. If you have questions regarding IRS audits or your specific situation, it can be helpful to connect with a specialized crypto accountant.

I Didn’t Report My Cryptocurrency Transactions During Previous Years. What Should I Do?

If you did not report your cryptocurrency trades in previous years, you should amend your previous tax returns to accurately report these numbers. The IRS is retroactively going back as far as 2013 in audits against cryptocurrency non-compliance.

My Employer Pays My Wages in Virtual Currency. Do I Need to Report This On My Taxes?

Yes. Wages paid via cryptocurrency need to be treated as income for tax purposes. You will need to report this income by using the fair value of the cryptocurrency at the time you earned it. You can identify historical values automatically by importing your crypto income into crypto tax software

 

 

David Kemmerer is the CEO & Co-Founder of CryptoTrader.Tax, cryptocurrency tax software that automates your crypto and bitcoin tax reporting.