Listen to a news report or skim through social media, and you’re bound to encounter references to cryptocurrencies, smart contracts, tokens, and blockchain. If you are a business owner or new ecommerce startup, you’re likely to have thought about how technology and associated cryptocurrencies might help your company grow in ways similar to the revolutionized industries involved with freight coin and blockchain health. Even if you are not a techie, you may have considered entering the conversation in order to become an investor in cryptocurrencies or have dabbled in mining them.
Before you start investing in cryptocurrencies or modifying your business practices, you may want to consider what this will mean for you at tax time. Since most people don’t want to be surprised by a huge tax liability at the last minute, it’s important to understand the tax implications of investment.
Reporting is your responsibility. While trading stocks and bonds results in the issue of a 1099 tax form, most cryptocurrency exchanges or transactions do not. This means that the responsibility for keeping track is on you, even if you are a casual investor or miner. Buying Bitcoin or other cryptocurrency does not necessarily mean that it must be reported. What matters is what you did after it was acquired.
In other words, if you sold the cryptocurrency and then realized a loss or a gain, this must be reported. Similar to the purchase and sale of stocks, if the price after acquisition went up, it is considered a capital gain; if it went down, it is considered a loss. You may be inclined to think that if the no one is reporting your gains to the IRS, then no one knows about your investments. But it is better to be transparent about your trades due to the fact that penalties and fines will be involved if they are not reported, but are later discovered. The best way to avoid penalties (and potential criminal prosecution!) is to report as accurately as you can.
Cryptocurrency is considered property, not money. The IRS considers cryptocurrencies to be property. Like stocks, bonds, and real estate, you will need to pay taxes if you had a capital gain and your tax bill can be lowered if you’ve realized a loss. For each trade, whether it is partial or complete, you will need to know when you bought the crypto, how much you paid for it, when you sold the crypto, and what you received for it.
This information provides the basis for determining the gain or loss, and accurate record keeping is critical for reporting. If you mine cryptocurrencies, you should also report any proceeds from mined crypto as a gain. While it may be too late for this tax season and you will find yourself scrambling to gather the required information, remember moving forward to maintain a detailed log of all cryptocurrency purchases, sales, or trades.
There is help! TurboTax, H&R Block, and some other online tax platforms can help you sort through the filing process for cryptocurrency transactions, which should be reported on Schedule D (1040 Form). There are also specialized tools available like Bitcoin Tax and CoinTracking that can help you determine your transaction history and provide support for some of the more specific cases like mining.
Additionally, in 2014, the IRS published guidelines that can help you sort through the ways in which virtual currency transactions are taxable by law, and an attorney like Aaron Kelly, with an expertise in technology and ecommerce, can assist businesses that serve consumers through online channels.
Things will change. It looks as if 2018 will be a landmark year for the IRS and its interest in cryptocurrency taxation. Because digital exchanges are not broker-regulated by the IRS, preparing tax documents for cryptocurrency exchanges can be difficult and complicated, and the recent changes to tax law will impact investors.
The IRS’s view that cryptocurrency is property rather than currency and the new law that specifically eliminates the “like-kind” exemption except for real estate transactions means that investors can no longer view inter-crypto exchanges as a non-taxable transaction.
Understanding the implications of tax law on the mining and investing in cryptocurrencies is critical to making sound financial decisions. Whether you are just a novice or have developed a plan for cryptocurrency investment or exchange, getting informed will help you avoid those unpleasant and often unanticipated surprises in April!
What are your concerns with crypto and tax season? Share your concerns and questions in the comments.