Tax reporting season is coming up in the US, and we would like to share the highlights from a January episode of podcast Unchained, in which host Laura Shin had a conversation with tax attorney Tyson Cross and CPA Jason Tyra about tax rules crypto owners in the US should pay attention to. You can check out the original podcast here.
1. Every single sell of virtual currency is a taxable event
That includes not only cashing out cryptocurrency for fiat but also buying a cup of coffee, exchange one type of virtual currency for another.
Under IRS rules, cryptocurrencies are categorized as properties. When they are sold, the seller is subject to capital tax gains. When they are sold at a loss, the seller can claim losses.
2. Taxpayers are responsible for keeping track of crypto transactions
Taxpayers are advised to keep a spreadsheet of their own to record the date of a transaction, the buying price, the currency. Transaction fees are treated as deductions.
In terms of matching buys and sales or determining the cost basis, the IRS hasn’t issued guidelines, so the taxpayer can do either first in first out, last in first out, or cherry-pick.
However, cherry-picking will be very time consuming and may result in mistakes, Cross and Tyra warned. Both experts used first in first out with their clients, while also acknowledging that the practice doesn’t result in the least taxes in a rising rate environment.
Some exchanges keep records for their users, but they cannot keep track of the buying price of the assets if the user transferred the currencies from another exchange or from their wallet, and sometimes the way exchanges characterize transactions can be misleading.
The cost basis may not be right when users transfer crypto from other sources. Non-US exchanges may have different terminology. Decentralized exchanges may not keep records for users at all.
Since every sell is a taxable event, trading cryptos just for fun is probably not a good idea.
https://bitcoin.tax/ and https://cointracking.info/ are two popular tools for the purpose of reporting taxes on crypto. Cross hasn’t used them, and Tyra said his clients use them and they worked well.
When a taxpayer acquires cryptocurrencies through hard fork, the experts recommended the cost basis to start at zero. Better IRS guidance on the matter is needed, Cross said.
3. Claiming transactions to like-kind exchanges may delay paying taxes, but the IRS can challenge that.
IRS section 1031 rules that taxpayer can postpone paying tax on the gain if he/she reinvests the proceeds in similar property as part of a qualifying like-kind exchange. Since cryptocurrency is a new asset class, the IRS has no rules on determining like-kind exchanges on crypto.
That means that the IRS may challenge the claim, and the taxpayer will either have to pay up or face a potential lawsuit. The new tax code’s like-kind exchange only applies to real estate, but the taxpayer can consider the option if their crypto was sold before the rule changed.
Even if the taxpayer doesn’t have to be taxed for it, in the end, one still needs to report it at form 8824.
4. Selling at a loss and then buying back can be a way to avoid tax...until it can’t be.
Such a practice is called wash sales in security terms, and the IRS has a rule against wash sales- the IRS cannot recognize a loss on an investment if that investment was purchased within 30 days of sale (before or after sale).
For now, this rule doesn’t apply to cryptocurrencies because they are not securities, but taxpayers need to beware of economic substance doctrine, which means that any trade having no substance other than tax benefits is deemed invalid.
5. If you are a Coinbase user
IRS has requested all transactions records for customers who have transacted in amounts larger than $14,000. If you fit this criterion, you should consult with a tax advisor to determine whether you are at risk of civil and criminal penalties due to unreported income, wrote Cross in an email to Unchained.
For a more detailed explanation on tax policy as well as insights on various scenarios like payroll and mining, please refer to the original podcast.
Disclaimer: this article is only a general guidance based on research. It’s not legal or accounting advice. Please refer to a lawyer or accountant for guidance to your specific needs.