Have you wondered what to do with about your crypto taxes? At CryptoTraders Pro, we’ve got you covered! As tax time quickly approaches, it’s critical to make sure that you stay in compliance with the tax-man.
We had the pleasure of interviewing David Kemmerer who is the Co-Founder of Crypto Trader.Tax, one of the nation’s largest crypto tax preparers.
Check out our interview with David to get answers to some of the most common Crypto Trading Tax questions…
Want to listen while driving?
Right now, we’re happy to offer a coupon code for our community for Crypto Trader.Tax – use the code CRYPTOTAX10 and you’ll get 10% off their report or just click here to use our referral link for a discount!
So what’s the gist? If you don’t have time to read through all the Q+A’s, what’s the important bits that you should know? You need to pay taxes. That’s it. Pay your taxes. And with CryptoTraders Tax, it’s super easy to do so!
You don’t want to get in trouble with Uncle Sam – that’s something you don’t want to do. Unlike most areas of our government where you’re assumed innocent until proven guilty, Taxes are one of the few things where you’re required to prove your innocence – not the other way around.
But why do you have to pay taxes? Well, simply put, Uncle Sam considers cryptocurrency as property. That means cryptocurrency is subject to capital gains and losses similar to other forms of property like stocks, bonds, real-estate, and or gold. You need to file taxes for your trades when you trade one coin for another or whenever you sell your crypto. Buying and holding cryptocurrency is not taxable – you only realize your gain or loss when you sell. With Crypto Traders.Tax, it’s simple. It’s easy. Use our code: CRYPTOTAX10 to save 10%.
You owe taxes for previous years too – so make sure that you’re paying taxes and amend your previous taxes for previous years to make sure you’re in compliance.
If you think you don’t have to pay Uncle Sam his pound of flesh, just remember that Al Capone wasn’t jailed because of his crimes – he was jailed because it was proven he lied on his taxes. So cover yourself, and let Crypto Traders Pro and Crypto Traders.Tax help you out!
All of your questions about cryptocurrency taxes answered…
- Are my cryptocurrency trades taxable?
Yes. Cryptocurrency is treated as property by the IRS in the United States. This means that it is subject to capital gains and losses taxes similar to other forms of property like stocks, bonds, real-estate, or gold.
You will need file taxes for your trades when you trade one coin for another or whenever you sell your crypto. Simply buying crypto and holding cryptocurrency is not taxable, and you only realize your gain or loss when you sell.
- How do I calculate my gains and losses from my trades?
To calculate your capital gains and losses on your crypto trades, you simply use this formula:
Fair Market Value – Cost Basis = Capital Gain / Loss
Cost Basis is the original value of an asset for tax purposes. In the world of crypto, your cost basis is essentially how much it cost you to acquire the coin.
Fair market value is just how much an asset would sell for on the open market. Again with cryptocurrency, this fair market value is how much the coin was worth in terms of US dollars at the time of the sale.
Example: Let’s say you bought 5 Ethereum on Coinbase in January of 2018. You paid $2,000 for these ETH ($400 for each coin). After the market took a turn for the worse, you sold 3 of these ETH in July for $150 each.
In this example, your cost basis for the 3 ETH that you sold is $1200 (3 * 400). You sold the coins for $450 total. This is your fair market value.
Doing the math,
450 – 1200 = -750.
You incurred a $750 capital loss. You would file this loss on your taxes and it would save you some money on your tax bill. You would not owe taxes on the 2 ETH that you are still holding because you haven’t traded or sold them yet.
Keep in mind, coin-to-coin trades are considered a sale for tax purposes.
So let’s say instead of selling your 3 ETH for US Dollars, you traded your 3 ETH for X amount of Bitcoin. Well in this case you still have triggered a taxable event, but now your fair market value is a little bit harder to calculate. You have to know what the value of 3 ETH was in USD at the time of trading to calculate what your loss is on the transaction.
Using Crypto Tax Software to crunch all of these historical numbers for you can be a big time saver.
- What do I do with my 1099-K from Coinbase, Gemini, or GDAX?
A 1099-K is an informational form to report credit card transactions and third party network payments that you have received during the year. It is not an “entry” document, meaning you don’t need to attach or “include” it in your tax return.
1099-Ks from exchanges like Coinbase report the total dollar amount of transactions that occurred from your account. This number can therefore be huge and not at all represent how much money you put into Coinbase or how much money you owe or do not owe in taxes. The IRS is aware of this. Your 1099-K will also be completely inaccurate if you have moved crypto into other wallets, exchanges, or other platforms differing from the one that sent you the 1099.
Tax software like CryptoTrader.Tax can be used to aggregate your data from all of your exchanges and automate the creation of your form 8949.
In order to properly report your crypto taxes, you need to capture your holistic crypto activity across all exchanges and platforms and complete a form 8949. Your 1099-K is not included in your tax return.
- Can I save money on my taxes if I lost money trading?
Yes. If you realized losses throughout the year from trading crypto, these losses can and should be used to offset other capital gains as well as up to $3,000 in ordinary income. Keep in mind, you need to “realize” these gains to be able to write them off on your taxes.
What does this look like in real life?
Let’s go through an example to paint a clear picture.
Let’s say you gained $20,000 in the stock market this year (this is a capital gain), and you lost $20,000 trading cryptocurrency. Your loss in crypto would completely offset your 20K stock market gain. Therefore, you would pay no taxes on your stock market activity. If you are at a 25% tax bracket, this form of tax loss harvesting would save you $5,000 in taxes (20,000 * 0.25).
*Note, there are many other forms of capital gains that your crypto can offset.
What if I have no other forms of capital gains?
In the scenario where you have no other capital gains, your losses simply offset your income up to $3,000.
As an example, let’s say you started 2018 doing really well as a crypto trader. You made $5,000 trading Bitcoin and Ethereum. Once August rolled around and the markets took a turn for the worse, you got hit hard and the value of your portfolio dropped significantly. You ended up selling out of all of your positions and took a $7,000 loss. From here, you would be able to harvest a $2,000 loss for the year. This loss would be deducted from your taxable income for the year. Let’s say you made $50,000 on the year in income. With this loss, only $48,000 of that income would be taxable.
- Cryptocurrencies change in value all of the time – How do I know what value to report to the IRS?
Virtual currency wages, self-employment income, or cryptocurrency trades should be reported using the full fair market value of the cryptocurrency at the time the payment was made. If you don’t have a record of what the fair market value of your crypto was when you received it, you can input your income or trades into crypto tax software to determine historical USD values.
- Crypto is so complex, will the government really be able to prove I am not accurately reporting my taxes?
It is actually not on the IRS to “prove” that you accurately reported. If audited, the IRS will require you to prove to them that you did handle your money and cryptocurrency in the way you claimed on your tax return. The concept of “innocent until proven guilty” does not apply to the world of IRS audits.
The IRS has also made it clear that it is taking cryptocurrency very seriously after it announced on July 2nd, 2018 that one of their core campaigns and focuses for the year is the taxation of virtual currencies.
- When do I owe taxes on my cryptocurrency?
The following have been taken from the official IRS guidance from 2014 as to what is considered a taxable event for cryptocurrency. A “taxable event” is simply a fancy term describing the circumstances that you incur a tax liability that you must report.
- Trading cryptocurrency to fiat currency like the US dollar is a taxable event
- Trading cryptocurrency to cryptocurrency is a taxable event (you have to calculate the fair market value in USD at the time of the trade)
- Using cryptocurrency for goods and services is a taxable event (again, you have to calculate the fair market value in USD at the time of the trade; you may also end up owing sales tax)
- Giving cryptocurrency as a gift is not a taxable event (the recipient inherits the cost basis; the gift tax still applies if you exceed the gift tax exemption amount)
- A wallet-to-wallet transfer is not a taxable event (you can transfer between exchanges or wallets without realizing capital gains and losses, so make sure to check your records against the records of your exchanges as they may count transfers as taxable events as a safe harbor)
Buying cryptocurrency with USD is not a taxable event. You don’t realize gains until you trade, use, or sell your crypto. If you hold longer than a year you can realize long-term capital gains (which are about half the rate of short-term) if you hold less than a year you realize short-term capital gains and losses.
- Will I be audited if I don’t report my cryptocurrency gains and losses?
Obviously, no one can answer this question for certain. Audits do not happen very often for average citizens; however, the IRS has explicitly stated that the taxation of virtual currencies is one of their core campaigns and focuses for the year. Staying on the right side of the law and avoiding tax fraud is a safe way to go.
Rest assured, it truly is not that difficult of a process to report your crypto trades. The process is as simple as uploading your trading history into crypto tax software and generating the necessary reports. Simply give these reports to your accountant or upload them into tax filing software like TurboTax.
If you have questions regarding IRS audits or if you should or should not report your cryptocurrency on your taxes, we recommend connecting with a specialized crypto accountant.
- I didn’t report my cryptocurrency transactions during previous years. What should I do?
If you did not report your cryptocurrency trades in previous years, you should amend your previous tax returns to accurately report these numbers. The IRS is retroactively going back as far as 2013 in audits against cryptocurrency non-compliance.
- My employer pays my wages in virtual currency, do I need to report this on my taxes?
Yes. Wages paid via cryptocurrency are treated as income for tax purposes. You will need to report this income by using the fair value of the cryptocurrency at the time you earned it. You can identify historical values automatically by importing your crypto income into crypto tax software.
David Kemmerer is the Co-Founder of CryptoTrader.Tax, the leading online cryptocurrency tax service for automating your tax reporting. Connect to exchanges, import yout rades and generate a report to upload into Turbo Tax – reporting your crypto for taxes has never been simpler! They even have 100’s of licensed CPA’s that are crypto-knowledgeable to assist you! Sign up now and receive a discount by clicking here. Let us know if you have any questions about our pro group or CryptoTrader Tax. Remember – use the code CRYPTOTAX10 and you’ll get 10% off their report or just click our link!!
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