On February 13th, Credit Karma reported that only 0.04 percent of Americans that have already filed their 2017 taxes had claimed their cryptocurrency gains and losses. With the entire cryptocurrency market starting at $18 billion in January and growing to over $600,000 billion by the end of the year, Credit Karma expected more individuals to be reporting. Filing cryptocurrencies are a big gray area for most, as I’m sure many are completely unaware as to how they would even begin the process. Still, last year the IRS took Coinbase to court and won, having to hand over the documents of over 14,000 cryptocurrency investors who didn’t file their cryptocurrency gains or losses.
With that said, play by the rules or they will find you.
If you need help figuring out what you need to report, read below. It can be a rather difficult task, as most tax issues are but if you’ve never sought out tax advice before – you probably will need to moving forward.
Originally Posted: Jan 26th, 2017
The cryptocurrency market grew over 3200% in 2017 alone. Towards the end of the year, there was an influx of investors flooding the market. As tax season has just begun, some have been left wondering how they need to report their cryptocurrency with their taxes. If that’s you, you’ve come to the right place.
The United States of America generally treats cryptocurrency as property. It is not treated as a currency like the U.S dollar but more of a capital asset such as stocks, bonds, or other investment properties. Due to it being treated as property like real estate or gold, it is subject to short and long-term capital gains tax when held as an investment. If you do anything but “HODL” your cryptocurrency you most certainly owe the short-term capital gains tax. Let me explain this a bit further.
- Trading cryptocurrency to a fiat currency, more specifically USD.
- Trading cryptocurrency to cryptocurrency. One must calculate the fair market value in USD at the time of the trade.
- Using cryptocurrency to buy goods or service. In this case, one must calculate the fair market value in USD at the time of the trade, and you might also owe sales tax.
Non Taxable Events
- Giving cryptocurrency as a gift.
- Wallet to wallet transfers.
- Buying cryptocurrency with USD. If you hold it longer than a year, you can realize long-term capital gains.
In simple terms, if you are doing anything more than buying, transferring, or holding digital currencies it is a taxable event. You realize capital losses or gains a fair market value at the specific time of when you traded, sold, or used your cryptocurrency.
My advice? Start collecting your documents now. For some, this may be a lengthy process and requires the help of a licensed professional.
Like-Kind property exchange claims are buzzing around the cryptocurrency space. Many are trying to avoid crypto-to-crypto trades being a taxable event, but it remains unclear if it is possible to do so. If you intend to claim this, I strongly recommend a licensed tax professional and additional forms will be required.
IRS guidelines say:
“the character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer.”
Cryptocurrency is treated as a property for tax purposes. It is subject to short and long capital gains taxes. Trading, selling, and using cryptocurrency is a taxable event.
When finding a tax professional, make sure they are well versed in cryptocurrency as this will be something new for a lot of tax professionals. If you are choosing to exclude your cryptocurrency dealings in your taxes I must warn you, last year the IRS went after Coinbase and won. The company had to disclose information on over 14,000 accounts last year that traded or exchanged more than $20,000 USD. I only covered the U.S but here are more guidelines in various countries or the latest news in regards to tax regulation.
Australia (the Australian gov website is down at time of publication)
NOTE: I am not a tax professional and do not offer any tax advice. This is merely a compilation of my own research on cryptocurrency and tax laws. I will attach the official IRS notice below and please contact a tax professional if you traded a significant amount within the year 2017.
Featured Image: Dallas