Disclaimer: I am not a professional accountant, financial advisor, or certified CFA or CPA. Anything I say or that you read here does not constitute legal, financial or tax advice. That said, I’ve done some Googling and some serious question asking.
Yes. Cryptocurrencies are taxable according to this IRS memo. They are taxable as income if you sell them less than 1 year (365 days) of buying them. They are taxable as long-term capital gains (capital gains for short) if you sell them after 1 year of buying them. They are not taxable if you never sell the crypto assets that you buy. All of this applies to US citizens at home and abroad.
Can you interpret this IRS memo as unofficial and unenforced, and not pay taxes for 2017? At your own risk.
2. Are cryptocurrencies an asset (like a stock) or a currency (like the US dollar)?
An asset. In the eyes of the IRS and the SEC (the regulatory bodies that matter in this case), cryptocurrencies are a “capital asset.” You can read more on their stance in this memo here. It may not look like an official document, but it is.
3. How do I report my cryptocurrency capital gains to the IRS? How do I include this information in my 2017 tax returns?
Calculate the cost basis and capital gains of every “taxable” crypto transaction you made in 2017, and attach it as a separate “statement” to Schedule D, Form 8949. This can be a spreadsheet. Then write in one row on Form 8949, containing the total capital gains and losses on those transactions for 2017. Write “See attached statement” below that.
4. What is cost basis? Why is it the most important part of calculating capital gains?
Cost basis is the original value (price x quantity) of an asset at the time of purchase. It is one of only two elements used in calculating capital gains, the other being the total sale value (or market value) of the asset when it is sold. The capital gain is equal to the difference between the asset’s cost basis and the current market value. Knowing the price of something when you sell it is pretty evident, knowing what that asset cost you in US dollars many months and transactions ago can be tricky to trace back.
5. How to calculate cost basis and capital gains:
Cost basis: (Quantity of currency x Purchase price of currency)
Capital gains: (Quantity of currency x Sale price of currency) minus (Quantity of currency x Purchase price of currency)
6. What exactly is “taxable” and what isn’t? What are “taxable events”?
Every time you sell a cryptocurrency for a higher price than you bought it for, that is a taxable event. This includes times when you sell a cryptocurrency for US dollars, as well as when you sell a cryptocurrency for another cryptocurrency. Prices at the time for sales of a crypto for another crypto need to be converted back into US dollars in the latter case.
7. How cost basis works if you used just one exchange in 2017:
All you need to do is attain a spreadsheet of your taxable transactions (sales) from that exchange. Some exchanges, like Coinbase, allow you to print out cost basis spreadsheets containing taxable sales like this: https://www.coinbase.com/reports. If your exchange does not provide this option, you can use a service like YaxReturns.com to create the spreadsheets.
8. How cost basis works if you’ve transferred crypto across multiple exchanges in 2017:
Trickier. You need to keep track of the price at which you bought each amount of each of your cryptos before buying other cryptos or transferring them across exchanges. Then you need to figure out which quantities of those sold cryptos belong to which cost basis quantities (using a method like FIFO, LIFO, etc.), because it is unlikely that you’re selling 1 whole Bitcoin for 1 whole Ether or Litecoin every time you trade. This is difficult but not impossible to track. Shameless but useful plug: tools like YaxReturns.com can help you.
**The difficult part is that no single exchange can give you all the info you need. Coinbase doesn’t know the real price at which you bought a Bitcoin on Kraken before transferring it to a Coinbase wallet, only the price of Bitcoin on the day you sent it to Coinbase.
9. How cost basis and capital gains work with trades between multiple currencies:
Say you buy 1 Bitcoin on Kraken for $500 US dollars. You then use that 1 Bitcoin to buy 1 Ether and 1 Ripple, both on Kraken. If the price of the Ether and the Ripple go up, then you need to know what the price of Bitcoin, Ether and Ripple were the minute you purchased the Ether and the Ripple in order to know your capital gains in terms of US dollars. It’s as if you actually bought the Ether and the Ripple using US dollars instead of a given amount of Bitcoin. The process repeats if you then use the Ether and Ripple to buy other currencies.
Likewise, say you bought 1 BTC for $500 and 1 ETH for $200. You then sold 2/5 of your BTC to buy some amount of ETH. Then you sell all of your ETH for USD. What is your cost basis for the sold ETH, given that you bought ETH in both the ETH-USD and ETH-BTC markets?
Section A-5 of the memo is where the IRS clarifies this.
10. What is the IRS’ official stance on crypto?
The IRS released a memo on digital currencies on March 25, 2014. It referenced that memo again on August 6, 2017. In the memo, it says that “A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets” (section A-7). Those are the only two official mentions the IRS has made about crypto and digital currencies, but they are significant.
Furthermore, if you plan to wait until the IRS comes out with more information on the matter instead of paying your 2017 taxes as suggested, the memo addresses penalties for “underpayment or failure to properly file information” this year, in section A-16.
11. Am I safe from paying taxes if I use an exchange in another country or if I trade with anonymous accounts?
That’s a risk you alone are responsible for taking. It’s possible that the exchange in another country will never comply with the US Government or the IRS and hand over your trading information to them, but if the exchange ever did that and you hadn’t paid taxes for some years, you could be penalized. Similarly, if you trade on a US-based exchange that has not handed data over to the IRS or you signed up for that exchange with an obscure email and name, you are counting on the idea that this exchange will never have to hand over your data. So far, Coinbase is one exchange that has already had to disclose the identities and trading activity of anyone who has purchased more than $20k worth of crypto on their platform, despite their original intention to not disclose their user’s information. I do not suggest or recommend you try evading the IRS like this.
12. What are major exchanges and wallets like Coinbase doing about crypto taxes?:
As mentioned above, some exchanges are providing spreadsheet downloads with your taxable trades. Coinbase has even posted warnings at the top of their website and app reminding you to “Please remember to pay your taxes this year.” However, the information that each of these exchanges has on your trades is limited and perhaps not useful at all if you have ever made purchases on one exchange and then transferred that crypto to another exchange.
13. Which forms do I need to fill out for my 2017 crypto tax returns?
Schedule D, Form 8949: If you just bought and sold crypto in 2017, you only need to fill out this form.
Form 1099-MISC: If you also paid someone for services costing more than $600 in 2017, you’ll need to fill out this form. Such services could be rent, services performed by someone who is not your employee, or medical, health care or legal payments.
14. What you need to give to your accountant:
Either calculate the cost basis and capital gains of every “taxable” crypto transaction you made in 2017 and give it to your accountant, to be attached as a “statement” to Schedule D, Form 8949. Or print out a spreadsheet containing the price and quantity of every purchase you made in terms of US dollars in 2017 and the price and quantity of every sell you made in terms of US dollars, and let your accountant calculate the cost basis and capital gains of each of these transactions.
15. Am I safe from paying taxes because crypto is a Section 1031 (a)(1) “like kind exchange”?
Previously some cryptocurrency holders and tax advisors interpreted the purchase and sale of crypto as a “like kind exchange”. A like kind exchange allows an individual to defer taxes on the sale of property if the proceeds of that sale are subsequently invested in a similar, like kind asset. In other words, there would not be capital gains or income taxes on crypto trades because you were buying and selling something very similar. Recently however, the IRS limited the interpretation of Section 1031 to real estate, which cryptocurrency is obviously not. Thus, Section 1031 definitely does not apply to cryptocurrencies anymore, if it ever did.
Ok tutorial over! Those are the most important facts about crypto taxes 2017. However, cryptocurrency tax regulation and compliance is a new and evolving space.
Let’s collaborate: To follow up this article, I’ve started a living, ongoing document where I’ll continue to add additional resources to keep you up to date on the latest crypto tax knowledge. Let’s compile a list of the best articles, tutorials, opinions, and tools on crypto taxes. You can find this continuation here: https://medium.com/p/887c7b596f01
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