The cryptocurrency market has been a live one this past year. Millionaires have been made and industries have been changed. Now, the U.S. Government wants their cut. Tax collectors are getting serious about citizens filing their cryptocurrency earnings. What is it investors are reporting this year and how are they going to report it? Obviously, this article is not legal advice and if anyone has specific questions, it’s best to consult your tax attorney or accountant.
Document All Holdings & Transactions
The overall goal of filing income taxes is to determine taxable income. The IRS needs to know what cryptocurrency assets were converted into fiat money or used to purchase goods and services. Bitcoin holdings as capital assets are taxed as property while cryptocurrencies that were traded for a gain will be taxed for income.
Download Transaction Data
It’s best to download all transaction data from the digital currency exchanges used over the past year. This should be downloadable in a CSV format. Some exchanges like Coinbase will issue 1099-K forms to users that have gained more than $20,000 in cash for digital currency sales. If the sum of trades is lower than 200 for the past year, CoinTracking.info will allow for a CSV upload that will organize the data for accounting purposes.
Where Income Should Be Reported
The majority of traders will have purchased bitcoin or other digital currency and then sold it at a higher price. If you fit this category, the revenue from those transactions should be recorded on a Schedule D form and attached to a 1040 Form. The Schedule D form can also be used to record financial losses.
Short Term vs Long Term Capital Gains
If cryptocurrencies were purchased and held for less than one year, the income will be taxed as a short term capital gain and therefore taxed as ordinary income. If bitcoin or other cryptocurrencies have been held for longer than one year before sale, the digital currencies will be taxed at a lower rate. This is because the gains are considered long term capital gains. Long term capital gains tax rates vary by income bracket and range from 0-20%.
|Obtained Via||Holding Period||Report As||Additional taxes|
|Received for services||N/A||Ordinary income||State income tax|
|Bought for investment||< 1 Year||Ordinary income||State income tax|
|Bought for investment||> 1 Year||Capital gains||3.8 percent for top three tax brackets|
|Mined||N/A||Ordinary income||Self employment tax may be applicable|
Taxability of Mined Cryptocurrencies
Taking bitcoin for example, any bitcoin obtained through mining is taxed as ordinary income and based off fare market value. This can be beneficial for some as this means the digital currency is taxed on the value at the time it was mined. If the cryptocurrency miner is mining for themselves and not a corporation, they are subject to self employment tax which is 15.3% of earnings for the first $127,000. The brackets of self employment tax can be found on Accounting Coach.
Taxability of Cryptocurrencies Received For Goods and Services
If cryptocurrencies were obtained through the purchase of goods and services, the earnings would be taxed as regular income. This tax rate varies from 10 – 40% based on income bracket. This money is also taxable through state income taxes.
What if My Cryptocurrency Assets Are Held Over Seas?
If cryptocurrency accounts are held over seas but keys to the account are owned by a U.S. exchange, these monies must be reported to the IRS and Treasury. The IRS will require a Form 8938 while the Treasury will need a FinCen Form 114 submitted. The good news is, if the holdings over seas are less than $10,000, they do not need to be reported.
Cryptocurrencies Are Hard To Track, Can’t I Skip Reporting Income On Taxes?
Although this is true, it’s probably not the best idea to hide earnings from the IRS. The Government has taken an aggressive stance this year and has issued multiple memos reminding (or warning) citizens to file their crypto income. Just a little over a year ago the IRS obtained Coinbase records of everyone trading bitcoin from 2013-2015 and found only about 800 people reported their gains in their taxes. According to a report by The Daily Beast, the IRS also contracted Chain Analysis to identify cryptocurrency wallet owners that have not been paying taxes. Tax evasion is no joke and if the IRS suspects there is money being skimmed, get ready for audits and other investigative actions into your personal finances. Penalties for anything from negligence to understating can hit hard and if there are suspicions that an income filing was faked to conceal gains, go ahead and tack on an additional 75% of whatever the IRS believes to be an “understatement.” Luckily, if there is an accountant handling your filing, they will most likely be ready for the surge in cryptocurrency forms and declarations so you shouldn’t need to fret too much.