For many of us, the cryptocurrency market has been a rollercoaster of emotions. You may have started with a small investment, but are now sitting on a healthy profit. Regardless of whether you’re in the positive or not, there’s one thing you shouldn’t neglect – tax!
While the IRS discusses new tax laws, we have no choice but to use the un-clear guidance from way back in 2014. As a result, cryptocurrency investors are getting confused with the implications of their crypto trades.
Please see the below insights; there to guide you through your crypto taxes, starting with the most serious.
What You Need to Know About Crypto Taxes
- Stay up to date – Cryptocurrencies have been defined as a completely new asset class. As such, the tax ruling isn’t set in stone.
- Think about the future – Audits can sometimes cover previous years. If you misreport or fail to report, then it will likely come back to haunt you at a later date.
- Taxes are based on each individual transaction – In the US, gains and losses are realized every time a cryptocurrency is traded. For example, if you purchased a BTC for $5,000, then sold it for $19,000, your taxable gain is $14,000. If you held the cryptocurrency for a short-term period, (less than 12 months) the gain will be taxed as ordinary income. It doesn’t matter if you’re in the negative overall; you still owe tax on any individual trades that made gains. For example, if you sold 5 BTC (with a $95,000 total cost basis) for 100 ETH valued at $1,000 each ($100,000 total), you realized a $5,000 gain.
- Spending crypto is the same as selling it – If you purchased a $19,000 car with 1 BTC, it’s the same as if you had sold that BTC for $19,000, and then used the fiat funds to make the purchase.
- Cryptocurrency donations are deductible – For example, let’s assume that you donate 10 BTC ($19,000 each and $190,000 total) to a charity and that your cost basis is $5,000 each ($50,000). You can deduct the greater of the market value or the cost basis, without paying tax on the gain. This is why there has been such a large spike in donations made via cryptocurrency.
- What accountancy method? To date, the IRS has not been specific about which methods are acceptable for calculating crypto gains and losses. With that said, experts believe that cryptocurrency will be treated the same as securities, under FIFO (First In, First Out). FIFO is also the method used in our Get Crypto Tax app.
A Case Study
If you frequent the Reddit boards, you may have seen the unfortunate story of the student who turned a $5,000 investment into a portfolio worth over $800,000. Now, you’re probably thinking that this doesn’t sound very unfortunate. However, this individual has since been hit with a staggering tax bill of more than $400,000.
Due to the decline of cryptocurrency prices, the student now claims to “only” have a total portfolio value of $125,000. On the face of it, this still seems very impressive. BUT, as per the current tax laws, the trader is now required to pay a 1099-K bill for $400,000 in taxation liabilities.
This case study is a prime example of how taxation is still a requirement for individual crypto-to-crypto trades, not just when a trader cashes-out to their fiat currency.
The Easy and Reliable Solution
Our simple, user-friendly website, Get Crypto Tax, is ideal for helping you to calculate your cryptocurrency taxes for the current and previous financial years. Our mobile app comes with 3 key features that make it the most suitable tool to calculate your crypto taxes:
- Coin to coin transfer calculator – We use historical pricing data from CoinMarketCap. All gains and losses are calculated using standard cost-basis (FIFO).
- Directly upload your trade history to the app – Download your trade history from the exchange that you use to trade. Export the data to a .csv file and import it directly into the app.
- Email the spreadsheet to your account or import to a program like TurboTax – Making it easy to file and store your account files.