For the wave of new cryptocurrency investors who jumped into the fray in late 2017 and early 2018, the upcoming tax season is going to present some new challenges.
Regulation is constantly being developed and announced, and the bear market continues as the April 15th deadline approaches.
Government institutions have been particularly cautious in their rollout of precise cryptocurrency regulations and tax guidelines. It is also rather unlikely that the current Congress will pass crypto taxation legislation that will guide the policies of the IRS.
The extended government shutdown did not help and the IRS has not provided any additional definitive tax guidelines, but their positions on cryptocurrencies so far reveals some important pillars to guide you.
First and foremost, the IRS identifies cryptocurrencies as property rather than currency. As such, cryptocurrencies are subject to tax rules which apply to transactions involving property like buying/selling stock and other capital assets.
Profits on cryptocurrency investing and trading need to be reported as capital gains or losses.
According to Credit Karma, cryptocurrency investors had more than $1.7 billion in 2018 realized losses, and most of them have no idea how to report their losses properly.
The IRS also distinguishes between long-term and short-term capital gains/losses - based on holding the asset for over a year. Importantly, if you purchased Bitcoin or other cryptocurrencies in cash and have not sold them (you’re hodling), then that is not considered a taxable event.
But purchasing one cryptocurrency with another is a taxable event, as you are selling the first to get the second.
Last year, only a small portion of people reported their cryptocurrency holdings with their returns, but that seems likely to change, as people are more inclined to report losses throughout the 2018 bear market.
Further, the scope of the IRS’s work with Chainalysis and other blockchain forensics agencies has likely widened, as blockchain analysis tools have become more developed.
Coinbase’s recent and highly controversial acquisition of surveillance company Neutrino has come with a just amount of criticism, and the addition does not bode well for Coinbase users looking to circumvent reporting crypto holdings.
The classification of cryptocurrencies as property comes with some important caveats. First, taxable events are the sale of cryptocurrency or its use to pay for goods and services. Wallet to wallet transfers between the same owner or crypto used as a gift does not yet formally qualify as taxable events.
Additionally, the IRS has not explicitly identified tax specifications for most cryptocurrencies - mainly just Bitcoin. According to the updated IRS Bitcoin tax filing guidelines: Bitcoin received for payment for goods and services and Bitcoin received through mining, need to be converted to USD and reported as income.
ZenLedger has recently partnered with TurboTax to facilitate a tax import of the 8949 form for your cryptocurrency taxes. This might help support a wider variety of coins and wallets, while providing detailed tax analysis.
If you’re unsure of how to file your taxes, the prudent move is to consult a tax professional or utilize many of the online resources available for assisting crypto users and investors. For instance, Coinbase provides a Tax Resource Center for their users, which also presents some general information on the 1099-k form and other general guidelines for filing taxes.
Regulatory-compliant exchanges in the U.S. may send a 1099-k to traders with high volumes of transactions, or large sums of cryptocurrency purchases. For example, Coinbase is required to provide a 1099-k if users engaged in over 200 transactions with a value of more than $20,000 - the value can vary by state.
Honestly reporting your holdings and doing your own research into available services and professionals that can assist you, is the prudent method for approaching your 2018 crypto tax filings.
Even if you think you may get away with holding privacy-oriented coins like Monero, ZCash, or Grin, you should know the purchase of these privacy coins can leave “holes” that tax authorities will eventually inquire about.
The official tax day is April 15, 2019, and you should probably get it safely out of the way while following the rules.
Be among the first to get important crypto and blockchain news and information with Forbes Crypto Confidential. It's free, sign up now.
