After the announcement made by the IRS in July 2018, paying taxes through cryptocurrencies is becoming a priority for people in the United States. Legally, cryptocurrencies are seen as property. Therefore, just like real estate, bonds, stocks, and other types of property, cryptocurrencies are subject to capital losses and gains.
One important fact about cryptocurrencies is that investing in it is not easy. For one, due to the fear of the worldwide government possibly running rampant, the crumbling of most digital tokens felled. Also, even though the bitcoin price reached incredible levels a few months ago, there are still uneasy feelings of economic uncertainty.
Another factor is that people must deal with cryptocurrency taxes now. With this factor, there is now even more uneasiness. Furthermore, with Bitcoin and other cryptocurrencies, various activities are likely scattered among various exchanges and platforms. These activities include selling, buying, transferring, forks, mining income, air drops, splits, wall transactions, and more.
All of these factors make crypto taxes challenging. With this broad array of transactions in multiple areas and economic uncertainties, the process of tax calculation and reporting is difficult.
On the other hand, there are helpful tips you can use to make the tax season less stressful. Because of these challenges, there are various steps to take to make the process easier. These steps are as follows:
1. Using proper preparation by maintaining a record of each exchange where you sold or bought cryptocurrency– do this for all cryptocurrency exchanges you utilized in the past tax year. Maintain detailed records, including the dollar value, the date of the transaction, and the proceeds. Certain software is available that automatically calculates capital gains and costs.
2. Maintain records of any crypto income received– when it comes to taxes, crypto income is treated different than crypto trades. Keep track of the transaction time, date, and crypto amount received.
It’s so crucial to ensure you properly file your tax return to the IRS. The IRS sent out warnings to filers about this. If not filed properly, crypto holders can get fined up to $250,000 and/or sent to prison.
3. Learn to calculate the losses and gains of crypto and bitcoin investments– you must know the US dollar value of the cryptocurrency acquired, sold, and traded. Otherwise, tax software for cryptocurrency would do the job for you.
To calculate the crypto gains, you can use the Fiat currency or the Satoshi/Bitcoin Price. The Fiat currency includes valuing your losses or gains using your local currency with the most common Fiat currency utilized. The most common ones could be the United States Dollar (USD), Euro (EUR), Great Britain Pounds (GBP), South Korea Won (KRW), and Japanese Yen (JPY).
This method is the easiest one because you will be aware of the value of coins bought with your domestic currency. For example, if the Bitcoin’s current price is $10,000 USD and you’ll bully $1,000 USD in Bitcoin, you would obtain .10 BTC for your $1,000. If the BTC increases to 50% to $30,000 USD each, your BTC also increases by 50%. Therefore, the valuing of your .05 BTC would be $1,500 USD. If you cash out your investment and sell all your BTC, you’ll gain a profit of $500 USD.
The Satoshi/Bitcoin Price method is an option to use because the majority of the cryptocurrency market can’t be acquired by using any of the Fiat currencies. Thus, these coins are acquired by buying the Bitcoin (BTC) first and then converting it to any alternative coins (altcoins). Thus, Bitcoin is the main currency for every cryptocurrency and the gateway to the cryptocurrency world.
Measuring losses or gains in the BTC value is the most accurate valuing of your investments. This calculating method for your trades takes into consideration the opportunity cost to hold on to Bitcoin instead of utilizing your BTC to buy other altcoins.
The opportunity cost is the potential gain possible that was given up for another course of action. For example, when using a BTC/ETH base currency to buy an altcoin, the opportunity cost is the possibility in losing the potential gains of holding BTC/ETH if they increased in value relative to your altcoin. With this example, holding the investments in BTC/ETH is better than the altcoin.
The main reason to invest in altcoins is to ensure a better generating return than Bitcoin. Your actual losses and gains must be measured against the BTC as each coin is traded against it. The BTC measurement unit is ‘Satoshi’, which was named after Bitcoin’s founder, Satoshi Nakamoto. This measurement unit is the smallest unit of a Bitcoin. For one Bitcoin, there are 100,000,000.
One thing to note is that calculating your gains in satoshi is a hassle due to the volatility of the Bitcoin. Thus, it is difficult to accurately determine your current value. There are, however, some wonderful free tools available for you to use in mitigating this complication.
4. Consulting a crypto tax professional– doing this is beneficial for complicated situations or if you are not interested in doing the reporting process on your own.
5. Reporting your crypto losses to save money on your US tax bill– every time you obtain a capital gain, you’re required to pay a tax of the gain’s dollar amount. For a capital loss, you can offset gains from other trades or from another property’s sale. The savings are huge for heavy losses.
For instance, there is a net capital loss when your total capital losses and gains for the year’s total is a negative number. For a net capital loss that is equal to or less than $3,000 which is $1,500 if filing a separate tax return and married, the total capital loss can offset other income, such as employment income. For losses that are more than $3,000, the excess amount over $3,000 is rolled over to the next tax year.
6. Reporting payments in bitcoin– more establishments use blockchain. However, there is no loophole to avoid paying taxes in transacting in cryptocurrencies. The IRS requires the reporting of crypto payments with transacting values of $600 or more.
7. Minding your deals– when getting an early start on tax planning, you can start looking for huge savings. Doing this will eliminate unnecessary penalties and interests.
8. Maximizing your deductions– since the Tax Cuts and Jobs Act of 2017, deductible expenses have not been as powerful as before. However, there are still plenty of opportunities that are available. Researching strategies and consulting an accountant can help you with this.
10. Maximize the losses, and minimize the gains– with the IRS treating cryptocurrency as property, all purchases, sales, and trades are taxable and subject to long and short-term capital losses and gains tax treatment. So, every time a transfer occurs, there is a loss or gain in taxes.
Some ways of minimizing capital gains include the following: Being a long term investor which will yield to lower capital gains taxes on investments. This lowering occurs the taxes of capital gains on investments are held longer than a year instead of being held for less than a year.
You can also opt to sell crypto for lower than the purchase amount. The result from doing this is incurring a capital loss that will then offset capital gains.
Another thing you can do is to opt to donate or gift unsold crypto. Up to $15,000 worth of crypto gifts won’t be paid in taxes.
Lastly, payments to independent contractors and employees are taxable and require other forms to be issued. If paid in bitcoin or another crypto, withholding and payroll taxes are subject to happen.
11. No game playing– as with taxes in general, you must not play around with your taxes. It will behoove you not to take for granted that just because cryptocurrency is decentralized you can cut corners when it comes to cryptocurrency taxes. Playing around with taxes can lend you in jail.
After the announcement made by the IRS in July 2018, paying taxes through cryptocurrencies is becoming a priority for people in the United States. Legally, cryptocurrencies are seen as property.
One important fact about cryptocurrencies is that investing in it is never easy. Also, even though the bitcoin price reached incredible levels a few months ago, there are still uneasy feelings of economic uncertainty. Another factor is that people must deal with cryptocurrency taxes now. Furthermore, with Bitcoin and other cryptocurrencies, various activities are likely scattered among various exchanges and platforms. These activities include selling, buying, transferring, forks, mining income, air drops, splits, wall transactions, and more.
Even though cryptocurrency taxing is difficult, you must use your absolute best to properly prepare your taxes or hire a reputable tax professional. It’s so crucial to ensure you properly file your tax return to the IRS. The IRS sent out warnings to filers about this. If not filed properly, crypto holders can get fined up to $250,000 and/or sent to prison.
With the adherence of the steps mentioned above, you will ensure Uncle Sam remains happy with you. And you can go on with making the best of your life in investments and all.
