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Although Bitcoin prices have been taken some of tipping over this year (down 75% from a high peak in January), all in investment is a matter of timing and perspective. If you bought your Bitcoin at the beginning of 2017 or before and sold in 2018, you are sitting on an orderly profit. As with other types of income, IRS wants its share.
Fortunately, by calculating your profit or loss and deposit your taxes on cryptocurrency it is not difficult in many cases. Where the process can get complicated is if you have a lot of coins exchanged in coins or if you have made many purchases with cryptocurrencies. If you have invested only in Bitcoin or other cryptographic coins through an exchange, the process is simpler.
Whether you are invested in Bitcoin, Ethereum or any other cryptocurrency, you will use the same general method to calculate your earnings (or losses) and deposit your taxes in the same way regardless of the type of cryptocurrency. IRS does not distinguish between the thousands of cryptocurrencies in relation to the way you report your earnings; they are all the same as IRS. However, every time you convert from one cryptocurrency to another, there is a taxable event. In this respect, there is a difference between the types of cryptocurrency.
Cryptocurrencies are "intangible properties"
IRS does it do not consider cryptocurrencies as currencies at all. Instead, cryptocurrencies are considered intangible properties. In 2014 the IRS issued a guide indicating that while virtual currency operates as a "real" currency and functions as a medium of exchange, he has no legal status in any jurisdiction. The IRS therefore considers that cryptocurrency is a fixed asset, treated as immaterial personal property for tax purposes.
In the past, some cryptocurrency investors used what appeared to be a loophole for exchanges of kind kind. Those familiar with real estate investments and even homeowners may be aware that the IRS allows you to use the proceeds from the sale of a property to purchase another "like" property without triggering a taxable event, even if you have made a profit on the first property.
The specific section of the Internal Revenue Code in question is Section 1031, which was amended under the Tax Cuts and Jobs Act of 2017 and now only applies to trade in immovable property, means real estate in the United States and not for exchanges of personal or intangible property. Going forward, cryptocurrencies are not suitable for similar tax treatment.
What defines a taxable event for Cryptocurrency?
In its simplest form, a taxable event for cryptocurrency occurs when the cryptocurrency changes hands. This means that, according to the new IRS guide, cryptographic exchanges with cryptography are taxable events and if you have a capital gain, should be referred to as short-term capital gain if you hold cryptocurrency for less than a year or a long-term holding gain if you hold the cryptocurrency for more than a year. According to the current IRS rules, an exchange from one type of cryptocurrency to another type of cryptocurrency is not an exchange of a similar type, and therefore, any gains are taxable as income.
Of course, a sale of a good cryptocurrency, where you convert your assets into cash trading in another cryptocurrency, is also a taxable event.
Moreover, when using the cryptocurrency to make a purchase, this purchase transaction also creates a taxable event. Your "selling price" for the cryptocurrency is the value of the cryptocurrency in US dollars at the time of purchase.
The best way to understand how the IRS logic behind crypto-to-crypto transaction taxation is to think of cryptocurrencies as a property – as IRS does – but there is a further step in mathematics. At each point of the transaction, there is a cost basis in US dollars and a sales price in US dollars. Traders can think of a transaction such as currency A exchanged for 10 of Coin B, for example. The IRS considers this transaction to be a conversion into US dollars for Coin A and therefore a new investment in Coin B, creating a corresponding cost base for Coin B, and therefore, the transaction that trades Coin A to Coin B creates a taxable event.
Likewise, making a purchase with Bitcoin or any other cryptocurrency is considered a taxable event. You have converted your investment into US dollars with respect to IRS and there has been a profit or loss.
Short-term and long-term capital gains
For 2018, short-term capital gains continue to be taxed as normal income and would apply to cryptocurrency transactions in which you held cryptocurrency for less than a year. Tax rates on long-term capital gains are unchanged for 2018 and are taxed at the rate of 0%, 15% or 20%, depending on the tax bracket. The long-term capital gains would apply to cryptocurrency transactions in which you held the cryptocurrency for more than a year before selling the cryptocurrency, exchanging the cryptocurrency with another cryptocurrency or making a purchase with the cryptocurrency.
Transfers from wallets to wallets, if within a year or after a year, they are not taxable because the cryptocurrency has not changed hands and at no time has been converted into US dollars.
Check this video for more information:
Capital loss limits
There is no limit on the amount of capital gains subject to tax. There is, however, a limit to what you can carry forward as a loss in certain situations. In a given year, you can bring up to $ 3,000 in losses to offset your current income. If you earned $ 50,000 in taxable income, a direct loss can potentially reduce taxable income to $ 47,000.
However, if you have capital gains in the same year, sight losses will be applied primarily to capital gains and therefore any residual losses can be applied to income, with a limit of $ 3,000. Losses higher than what can be used to offset capital gains or reduce income may be returned for use in future tax years until the loss has been fully utilized.
Find the cost base
To determine if you have a profit or loss for each transaction you will need know your cost basis. In other words, your cost base simply refers to how much you paid for a cryptocurrency in US dollars when you acquired the cryptocurrency. Technically, the cost basis for any capital asset is the cost plus any improvements. In the case of cryptocurrencies, since you have not made any improvements, your cost base is equal to your acquisition price. For example, if you bought a bitcoin for $ 1,000, the cost basis is $ 1,000.
To take another example, if you bought Bitcoin for $ 1,000 and a year later you traded it with Ethereum, you will need to know the price of Bitcoin and Ethereum at the time of trading. Let's say the bitcoin was $ 2,000 at that time you traded your bitcoin for $ 2,000 of Ethereum. IIn this example, you would get $ 1,000 in long-term capital gains on your bitcoin business and a cost basis of $ 1,000 for the acquired Ethereum.
Finding the relevant numbers will be less difficult if you've used a big bag like Coinbase / GDAX. In most cases, you should be able to download a report of your exchange transactions in a few clicks from the "my account" section.
If your cryptocurrency transactions were largely with one type of cryptocurrency on one or two exchanges, math should be fairly easy, especially if there were not many exchanges. If, however, you have been it exchanges cryptocurrencies frequently and in different markets or by making frequent purchases with cryptocurrency, you may have some research before you.
Some of the price information you need may be available in your cryptocurrency portfolios or in the reports made available through the bags you've used, but if you've had a lot of transactions you might consider the idea of using a service which aggregates the historical prices data and can help you collect the numbers needed to present your taxes on the cryptocurrency.
Cointracking.info It is a popular option among cryptocurrant traders. The service keeps track of historical prices for over 5,000 coins and can import data from bags or wallets, including digital wallets or hardware. The Cointracking.info service is free for up to 200 transactions and can provide you with the numbers you need for tax reporting. Paid levels can provide data for traders or investors with over 200 transactions.
Blockfolio is another growing service, which acts as a bitcoin and cryptocurrency portfolio management app and provides price for over 3000 cryptocurrencies. Available as a mobile app for iOS and Android, Blockfolio promises to keep you updated on the prices of cryptocurrency, the value of your portfolio, profits or losses and, above all, your cost base.
Calculation and reporting of losses or gains
If you only have one or two exchanges, all you have to do is subtract the cost base from the sales price to determine the amount of your income or loss. You will also need to determine if any gains are short or long term gains.
If you have had more exchanges or more purchases of cryptocurrency, this process may take a little more time simply due to the number of exchanges.
Capital losses are the reported capital gains Program D of your 1040 tax form. Form 8949 serves as a detailed work sheet to signal the sale of capital assets, such as shares or cryptocurrencies, and must be included in the return.
When to use the IRS 8949 form
Watch this video below to find out when to use IRS Form 8949.
Final thoughts
The recent IRS guidance makes the tax treatment of cryptocurrencies substantially similar to the tax treatment of shares in a standard investment account.
Cryptocurrency tax reporting obligations may seem difficult, but traders are encouraged to report their earnings or losses accurately. Cryptocurrency negotiations may not be as private as some might think. Bitcoin's blockchain, for example, contains a record of every bitcoin transaction in its history. The only thing that keeps your private transactions is that the owner of the Bitcoin wallet is not public.
Fortunately, there are now some tools to help cryptocurrency traders find historical prices. As cryptocurrencies continue to grow in popularity, traders can expect more tools and better reports available through marketplaces.
