Understanding cryptocurrency and taxes
As crypto investors enter the industry, many are often confused or surprised during tax season once their transactions and the corresponding implications go into effect. Taxes need to be taken into account for all investors – especially as crypto continues to grow – and it is best to understand this process fully before investing, not only to avoid surprises but to also help inform your investing decisions.
Here’s an introduction into how your cryptocurrency transactions will be impacted once tax time rolls around.
Crypto is taxed like property
The only official statement from the IRS on how taxes affect crypto was released in 2014, and it states that cryptocurrency is to be treated as property (rather than currency) for federal tax purposes. The statement also defines cryptocurrency as anything considered to be convertible virtual currency, meaning it has value or acts as a substitute for real currency. This definition doesn’t encompass ALL forms of cryptocurrency, but it does include the most popular ones like bitcoin, Litecoin, and ethereum.
So while most people may want to think of crypto as cash, the way it’s taxed means it should really be thought of more similarly to a house or a stock.
Do I need to report come tax time?
If you’ve bought crypto but you haven’t sold it, then you most likely do not need to report anything come tax time, because you haven’t realized any gain. However, if you’ve sold crypto, you will need to report on your gains and losses.
Here’s a list of the taxable events for which you’ll have to report:
- Trading cryptocurrency to fiat currency
- Trading cryptocurrency to cryptocurrency
- Using cryptocurrency to pay for goods or services
- Earning cryptocurrency as a form of income
Unless you’ve realized more than $20,000 in gains and have performed at least 200 transactions during the year, Coinbase will not issue a tax statement on your behalf – meaning you’ll be in charge of figuring out those implications on your own. Here’s how to get that process going.
Determining cost basis
The cost basis is the amount of money you put into a cryptocurrency purchase (the purchase price plus all other associated costs like transaction fees and brokerage commissions).
Cost Basis = Total Price / Quantity of Holding
Determining capital gain or loss
The fair market value is the sale price of cryptocurrency during a transaction. That figure minus your cost basis will equal your capital gain or loss.
Fair Market Value – Cost Basis = Capital Gain or Loss
Note: This is a brief and general introduction into determining the capital gain or loss of a cryptocurrency transaction, and is not representative of how to do so for every cryptocurrency transaction.
Crypto tax penalties
While there are no official regulations on crypto taxation or on the industry in general, there is some penalty information included in the IRS’ statement from 2014 that says there are penalties for not reporting, and that taxpayers could be subject to criminal prosecution for failing to properly report during tax season.
Trying to assemble all necessary information in a pinch is obviously a tall task for anyone, so it’s best to keep detailed records of all crypto transactions moving forward to improve your situation for future years. There are also several different forms of crypto tax software available that can help automate the tax reporting process so you can focus more intently on your investment strategies.
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