If you have any cryptocurrency or owned by any popular cryptocurrencies like Bitcoin or Litecoin, then you might have made some money as those were in demand. Now, the tax season has arrived, and it is important to know how the cryptocurrencies can affect your taxes. You can find many guides on how to handle Bitcoin-related taxes for the year 2017. Well, for this you need to have some clear idea about taxes on cryptocurrencies.
Who should pay taxes on cryptocurrencies?
If you purchased a huge amount of Bitcoin when it was cheap, then you are lucky. As per the rules, the Internal Revenue Service doesn’t tax cryptocurrency holdings whose value has been increased. But, if you are selling and using your cryptocurrency to buy something, then you need to worry about taxes. Any cryptocurrency can be taxed. Even though the IRS has not stated about the taxation on Bitcoin, Taxes will be applied to any coins you got from Bitcoin.
How will it be taxed?
If you obtained Bitcoin for service, then it will be taxed as state income tax. If you bought for investment, then it will also come under state income tax. If you have bought for investment and holding it for more than a year, then it will be reported as a capital gain, and you need to pay 3.8 percent for top three tax brackets. If you have mined, then you may need to pay self-employment tax if applicable. For Bitcoin fork, the tax method will be TBA.
How to pay taxes?
Before evaluating the taxation for your cryptocurrency, you should record all the transaction related to your cryptocurrency. Digital currency exchanges like CoinBase will send you a 1099 form for taxation. But you will get that form if you have sold minimum $20,000 in currency in around 200 different transactions. Or else you need to obtain your record, and you can get them from the blockchain as it is available publicly.
There you can download all your cryptocurrency transactions and it comes as CSV files. Apart from that, you need to evaluate the value of the transaction in U.S. dollar at the time of sale. Well, no need to worry about that as there are many websites where you can find the value of Bitcoin or other digital currency in that past. CoinDesk offers the past values of Bitcoin, Ethereum, Bitcoin Cash, Litecoin, and Ripple.
However, if you think that all these are a headache, then you can use a free tax program. Upload your CSV, and the program will calculate the amount you have owe. For example, you can use Bitcoin.The tax which is free for up to 100 cryptocurrency transactions and CoinTracking.Info. It is free for up to 200 transactions.
Also Read: 5 Tips for Investing in ICOs
How to pay less tax?
One can pay less in cryptocurrency taxes by following the regular taxes strategy, i.e., donation for charitable. But, you need to find out the charity who accepts cryptocurrencies. You can donate to The Water Project, Wikileaks, and the Internet Archive. Another option to pay less is don’t sell your cryptocurrency. Recently, the value of Bitcoin has gone down. But, it is expected that it will go up with time.
Remember that, as long as you don’t spend it, you won’t be taxed on it. Well, there is a lot of information that you can find about taxes of cryptocurrency. But, the fact is, it’s still not clear how one should handle the taxes for the cryptocurrency. The IRS issued the last guideline on this in 2014. But, a lot has been changed. So, what you can do is do your best for cryptocurrency taxation.
Crypto transactions and their tax implications
- Trading cryptocurrency generates capital gains or losses. If you gain more, the tax will be high, but in the loss, that will reduce the tax.
- The exchange of one digital currency with another can develop a taxable transaction. For example, if you use Altcoin to purchase Ethereum, then it will generate capital gains or losses. So, for that, you may need to pay taxes.
- If you are getting payments in the form of any digital currency in exchange for some products and service, then that will be treated as a taxable event. Because such transaction will be treated as ordinary income with market value.
- If you are spending cryptocurrencies, then that will lead to capital gains or losses. So, it is a tax event. It can be treated as short-term or long-term.
- If you are converting your cryptocurrency into U.S. dollars or another form of currency, then that transition will come under taxable event. Because here you are selling the cryptocurrency.
- Air drops are treated like the ordinary income, and the value will be considered as the basis of the cryptocurrency. If you are selling or exchanging, that will lead to capital gain.
- Mining cryptocurrency comes under ordinary income, and it is a tax event.
- Initially, an offering of cryptocurrencies normally does not come under the IRS’s tax-free transaction. This kind of transaction generates ordinary income.
Even though identification of the particular coin being sold or exchanged can allow taxpayers to manage their capital gains in both short-term and long-term, no exchanges or wallets have not been set up yet to decide which cryptocurrency to sell or exchange. Following this, the IRS (downloads as a pdf) will default to First-In-First-Out treatment, even though no guidance has been provided yet. So, for now, taxpayers can use their methodology in it.
Things to know about cryptocurrency during tax time
Cryptocurrencies are nothing new in this era, but many people are still buying it and cashing out. As they are buying more and more, they are now trying to understand how the tax law applies to cryptocurrency like Bitcoin, Litecoin, Ethereum and more. Janna Herron, a tax researcher, stated, “I think a lot of people who got into cryptocurrency maybe didn’t even think about the tax implications.” Well, there are certain things that you need to know during the tax period of cryptocurrency.
Reporting the tax obligations:
When one sells a stock or bonds, the brokerage firm normally gives a 1099 tax form. But, in case of cryptocurrency, it is quite different. Now exchange firms will send you the 1099 tax form. However, Coinbase will give you the form, if you have made $20,000 gains in minimum 200 transactions. This limit is only for major players. If you have invested in Bitcoin recently then, you will not get that statement.
Cryptocurrencies as property:
The IRS treats cryptocurrencies as a property like real estate. So, if you have got a capital gain or loss, then you will have to pay taxes. Here you need to give some information about when you purchased the cryptocurrency, how much you had paid for that, when you sold your cryptocurrency and how much you received from that. You may face confusion if you do various purchases frequently. There are some sites like Cointracking.info and more which can help you to know your tax liabilities.
Don’t hide the transactions from IRS:
If you are not reporting about your capital gains or losses to the IRS, then no one will able to know your investments. It is not good to hide your cryptocurrency’s transactions from the IRS, or else you may need to pay penalties for that. The IRS has a state that taxpayers may be subject to penalties for not reporting to the IRS. If you are reporting in time, it will show that you are not avoiding taxes. It has also been seen that taxpayers have faced criminal prosecution as they didn’t report the tax consequences of the cryptocurrencies they have.
Keep detailed records:
You may feel difficult while obtaining old statements related to your cryptocurrency’s transactions. It will be easier for you if you maintain detailed records of your selling and purchase So that when required, you can present all of your transaction to the IRS without any issues.
The IRS is now trying hard to crack down cryptocurrency reporting. The IRS has developed some ways of investigating all the unreported transactions, including some initial success in legal efforts to force Coinbase to turn over customer records. Informing more about it, David Utzke, Senior Revenue Agent at the IRS stated that in between 2013 to 2015 tax years, the IRS a has proceeds just 150 million individual tax returns annually.
Among them, around 84percent people have filled their tax returns electronically. When the IRS evaluate the data which were collected from 8949 tax return form, sales and other capital assets depositions, found that only 807 individuals had reported a transaction on Form 8949. Around 893 individuals had provided property description related to bitcoin in 2014. This number had gone down to 802 in 2015. So, based on this fact, the IRS stated the taxpayers are not giving tax on their cryptocurrency transactions properly. The taxpayer’s number is also now falling. Maybe very soon the IRS will release some new guidelines for this.