Taxpayers trading cryptocurrency may have forgotten about taxes after Bitcoin’s exciting coming-out party in 2017. However, for U.S tax purposes, almost every bitcoin or other "altcoin" transaction — mining, spending, trading, exchanging, air drops, etc., are expected to be a taxable event.
It’s no longer a surprise for the Internal Revenue Service to make 2018 as it’s landmark year of enforcing the laws regarding cryptocurrency gains. Although, you don’t have to worry if you are always ahead of the game instead of being reactionary. You can come forward on your own accord and not wait to be discovered. The difference between criminal penalties and simply paying interest is shown when you come forward.
The IRS began to suspect that many crypto users have been evading taxes by not reporting crypto transactions on their returns after finding out that only several hundred people reported their crypto gains each year since bitcoin’s launch.
The IRS, unfortunately, didn’t offer enough guidance with regard to the tax implications of bitcoin. However, it is clear that even though both the public and the crypto community consider bitcoin and altcoins as virtual currencies. They are treated by the IRS as property for tax purposes which means there are likely capital gain implications for every selling, spending and even exchanging crypto for other tokens. It is treated as ordinary income as well if it is received as compensation or by other means.
There are hundreds of cryptocurrencies aside from Bitcoin although it is getting the most attention these days. The bitcoin taxation being discussed are applicable to all cryptocurrencies.
When trading cryptocurrencies, capital gains or losses are produced. The losses are able to offset gains and reduce taxes.
Token exchange. If you’re using Ethereum to buy an altcoin, a taxable event is being created. The token is considered as sold which means capital gains or losses is generated.
Receiving payments in crypto. If you receive payments in crypto in exchanged for the products or services or as salary, it is treated as ordinary income at the fair market value of the coin at the time when it was received.
Spending crypto. This is another tax event that may generate capital gains or losses. They can be short-term or long-term. The holding period will dictate whether it could be a short- or long-term capital gain subject to various rates.
Cryptocurrency conversion. Capital gains are also generated when cryptocurrency is converted to U.S dollars or another currency at a gain. It is a taxable event as it is treated as being sold.
Selling and exchanging air drops. Also considered as ordinary income is airdrop on the same day where the airdrop happened and the coin will base on its value. There is a capital gain when it’s sold, exchanged, and other transactions.
Mining coins. The day the mining coin was successfully mined, it becomes an ordinary income equal to the fair market value.
The IRS’s tax-free treatment for raising does not include initial coin offerings. This results in the production of ordinary income to individuals and businesses alike.
Exchanges and wallets are currently not meant to choose which coins to sell or exchange although certain identification of the particular coin being sold or exchanged would enable taxpayers to take care of their short- and long-term capital gains. There may have been no guidance provided, but the IRS is expected to default to First-In-First-Out treatment. It will allow taxpayers to choose their methodology as it remains the same throughout the return.
It is the best way to minimize is to purchase and hold for more than a year. Short-term capitals are taxed at your regular ordinary income tax rate while long-term gains are taxed at a reduced rate. Although the decision is ultimately yours, you still need to consider the volatility and may need to lock in the profit now and take the tax hit.
You may need to report on your own since digital exchanges are not broker-related by the IRS. Cryptocurrency traders lead to a more complicated preparation for tax documents and exchanges does not issue a 1099 form. They also do not calculate gains or cost basis for the trader. It’s typical for most of them to not allow transacting in dollars and opt for Ethereum instead.
A detailed record of all crypto transactions at all exchanges is a must if the taxpayer wants to have all the crypto information required for their U.S tax return. Those records contain dates of earning, buying or exchanging coins, market value at that date. They are used to calculate the cost basis and the date and sales proceeds when a coin is sold, exchanged, or spent. The good news is there are various services available to help you with your trading history and offer you with a complete output for Schedule D on your tax return.
