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What to Do Before the IRS Comes Knocking: Cryptocurrencies and Taxation

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What to Do Before the IRS Comes Knocking: Cryptocurrencies and Taxation

Although cryptocurrencies have been around for a while now, 2017 saw new mainstream investors buying in and following the run up to $20,000, they’re quickly cashing out. At the same time, there’s a high possibility that many will face some major tax liabilities. However, how tax laws apply to virtual currencies like Bitcoin and Ethereum is still a grey area that not many can get their heads around.

IRS Wants a Slice in 2018

According to the Internal Revenue Service (IRS), virtual currency transactions are taxable by law. In 2014, the agency issued its first and only guidance on how tax principles apply to crypto transactions.

But Sarah-Jane Morin, an attorney in the tax practice group at Morgan Lewis, says that the issue passed in 2014 is considered tax authority. While it isn’t as binding as regulations, it is all they have to go on.

Janna Herron, a tax researcher, and writer at Value Penguin thinks that a lot of people who got into cryptocurrency didn’t even think about the tax implications.

Tax should be paid on cryptocurrencies, as they are considered property, says the guidance. It further adds that all convertible virtual currencies fall under the category of “cryptocurrency.”

While owners of Bitcoin may treat it as dollars or cash, the IRS looks at it similar to a house, stock or bond.

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For filing your taxes, information about your digital property would be required. The IRS would need – purchase details of the currency, the amount paid, date of sale, and amount of purchase.

Simply put, if you purchased bitcoin and haven’t sold it, you haven’t realized any gain. If you have sold bitcoin or any other cryptocurrency for that matter, in 2017, you will need to report the gains and losses. Here’s how.

Don’t Hide Trades

What you hide will surely take you for a ride. If you think no one knows about your investments if you aren’t reporting your gains to the IRS, you are wrong. If in the future they discover that you owe, you could be slapped with a handful of fines and penalties.

To avoid unnecessary penalties, the best procedure is to report all your gains and losses which show that you don’t intend on avoiding taxes.

Tax evasion attracts steep penalties too: People found guilty of tax evasion in America could be fined up to $250,000, a five-year prison term, or both.

Reporting Is on You

Unlike sales of stocks or bonds, where your brokerage firm or bank sends you a 1099 tax form, almost all or most cryptocurrency transactions don’t. The statement will only be issued if one has realized $20,000 in gains and performed at least 200 operations.

Even Coinbase, the US cryptocurrency behemoth, releases statements exclusive to “major players.” To avoid getting in trouble, don’t wait for an official statement from the bank or your exchange.

Services that help with filing tax

Initially, it will be tedious to go through receipts, statements, and emails trying to get all your information together.

However, like most things, it will get more comfortable with time to keep detailed records of what you bought and when you bought it. This makes the data very accessible when required.

Intimidated by the list? Don’t be! There are many services and websites out there that help investors and cryptocurrency traders to help calculate their taxes. You could find out your transaction history via Bitcoin.tax and Cointracking.info.

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