Ok, so up until 2017, you’ve meticulously read and memorized the Internal Revenue Code like I do. You know the ins and outs of like-kind exchanges. You dream about basis. You’ve never seen an IRS form you didn’t like. Sound familiar?
OF COURSE NOT!
If you’re like me, when April comes around, you pull out your dusty tax folder with all of your 1099’s and W-2’s and try to piece together what you did during the previous year in the hopes of staving off an IRS rapid response team bursting through your front door and auditing you to kingdom come. (I don’t think that’s a real thing, but you never know)
So, I’m sitting next to my tax pile and all of a sudden, I remember the cryptocurrency I bought and sold last year. . .
So how exactly is cryptocurrency taxed? Has the IRS created a coherent plan for Bitcoin gains and losses? Will my CPA know what to do if I show him or her my Coinbase account? What if I purchased alt coins? ICO’s? Am I in trouble???
Take a deep breath. This is the layman’s guide to crypto taxation.
First off, I am NOT A FINANCIAL ADVISOR. If you have serious questions or concerns, please visit a qualified CPA or financial advisor, preferably one well-versed in crypto language. This post is solely for information purposes only.
Ok, enough lawyer-speak. Here is what you need to know:
The IRS Views Crypto as Property, NOT Actual Currency or fiat currency. I’m not going to go into a breakdown of basis and capital gains because it would bore both of us to tears. For that, use Google or talk to a CPA or tax professional.
- For crypto, gains are only realized for tax purposes when the cryptocurrency is sold. So cryptocurrency you hodl (hold on for dear life) are not taxed. This is much like your house or even better, your collectible Star-Wars figurines. If you buy Han Solo for $5.00, then wait for him to increase in value and sell him for $20, you have a gain of $15 but a basis of $5. Easy enough.While you may be tempted to sell off all of your crypto assets to capture some profit, you may get some taxed heavily if you do. This is where a CPA comes in. They can calculate basis and gains.
- Changing Crypto to Cash: Anytime you exchange a cryptocurrency for a fiat currency (Bitcoin to cash on coinbase), you’ve triggered a taxable event and must determine your gain/loss. (See: Han Solo above) On the surface, this is fairly simple. Unfortunately, crypto basis is slightly different due to its inherent nature.
- Crypto to Crypto: Anytime you exchange one type of cryptocurrency for another (Bitcoin to Ether), you’ve triggered a taxable event and must determine your gain/loss. (Once again, See: Han Solo) An easy way to visualize this is to act like you sold your Bitcoin, received cash, then used the cash to buy the Ether. This is what the IRS will do. Once again, see my note about CPA’s. They come in handy for doing the math part of this. Side Note for those of you considering Like-Kind Exchanges: Under the 2018 tax law changes, like-kind exchanges are only allowed for real property. Basically, the IRS cleaned up any confusion about using a like-kind exchange for crypto. In 2017, this option was fuzzy. Like-kind exchanges are complicated and require several forms and various reporting to the IRS. If in doubt, use a CPA. If you mess this up, you are looking at major tax liabilities and a possible visit from the IRS hit squad. (once again, fictional…I think).
- Buying Stuff with Bitcoin: Whenever you pay for something with cryptocurrency, you’re basically selling that cryptocurrency for cash and using those proceeds to then complete the purchase. Therefore, you have to determine the capital gains. This is also the case for businesses accepting crypto. Your accounting just became more difficult.
Conclusion: Taxes are difficult. Crypto gains and losses makes filing your tax return slightly more difficult. Use a CPA if you have a question. Don’t know if a CPA is worth the trouble or cost? Imagine a CPA charging you hourly. If your tax liability is worth several thousand dollars to you, is it worth it to pay someone a couple hundred to make sure everything is kosher? YES.
Rational people pay their taxes.
Stay rational.
-B&T