Cryptocurrency Taxes — What You Need To Know

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HedgetradeHQ

9 min readJan 11, 2019

If you’ve used cryptocurrency for any reason this past year, you may find getting your 2018 taxes done is a bit of a tricky process. There are several reasons why it’s such a challenge to figure out what is taxed and what you may owe. This article will hopefully aid in providing some understanding for all cryptocurrency investors, traders and miners.

In the US and Canada, cryptocurrencies are now considered property, so all capital gains (any profits you make) are taxed accordingly. But a lot of crypto users have found that the task of figuring out capital gains is not as easy as it may sound. Many others feel that crypto to crypto transactions should not be considered and taxed in the same way as stock trades.

How are cryptocurrencies treated when it comes to taxes?

Regardless of how we all feel digital assets should be treated, the US and many other countries have ruled that cryptocurrencies, no matter whether they are security tokens, stable coins or utility tokens, are to be considered capital assets when it comes to taxes. Essentially, crypto trades (crypto-to-crypto or crypto-to-fiat) are treated the same way as any stock trade. But these digital assets are very different from stocks for many reasons, including:

It’s harder to profit on traditional stock exchanges — it’s costlier, slower, plus you need capital to start out for margin and trading fees. With crypto, you can start trading with less than €100 (~$115).
Because traditional trading venues are highly regulated, there’s a lot of paperwork required to get started. Crypto traders can begin trading immediately and even trade completely privately (anonymously) if they so choose.
The time frame when you can make trades on traditional exchanges is restrictive compared to the 24/7 availability of crypto exchanges.
Stock exchanges are required to buy stock insurance, not so with crypto exchanges. There are no safety nets yet with crypto, unless you consider crypto to be safety net itself.
You store your own assets with cryptocurrencies (or you should!), whereas with traditional trading, a 3rd party holds your assets.
Stock prices, volume, etc. are published daily in mainstream media. On the other hand, there is not one mention of cryptocurrency in today’s WSJ.
Stock exchanges are required to report your capital gains. Cryptocurrency exchanges are not. This may be changing.

It doesn’t matter that in many cases, cryptocurrencies are being used as actual currencies (which seems like a no brainer). The law in most countries still states that they are not.

What do crypto investors and traders need to do?

Until regulations, or even better, self regulations, are set up and functioning, the investor is left to their own devices, literally and figuratively. If you’re like most crypto enthusiasts, you probably own multiple coins, have made at least a few trades, and use several wallets.

You might have bought some crypto in 2018, been paid in crypto for work, accepted payment in crypto, or paid a freelancer in crypto. Just the thought of figuring out capital gains on all that activity can make a new trader queasy.

As an individual investor, you are on your own as far as reporting. There’s no 3rd party, as you have in stock trades, automatically keeping track of it all and preparing corresponding reports. Even though Coinbase does issue 1099-K’s, they only do so for investors who received at least $20,000 in gains with over 200 transactions. (This policy can vary state by state, and Coinbase says it will be updating its tax info in January of 2019).

What are crypto investors required to report?

US and Canadian investors are required to report all capital gains on every crypto transaction, whether it’s crypto to fiat or crypto to crypto. Additionally, if you take in a payment from someone for your business, that is also part of the reporting requirement.

Sounds kind of crazy. In response to this seemingly inappropriate ruling that all crypto transactions are treated as property transfers, two US Senators have put forth a bill that would change the status of crypto-to-crypto trades to non-taxable events. You probably shouldn’t hold your breath on this one.

Do crypto exchanges do the reporting for me?

As mentioned above, some exchanges are starting to do some reporting. But as it is, they are not required by law to calculate your cost basis, gains, losses or capital gains taxes.

You may have heard about the Coinbase case, where the IRS became suspicious when less than 1000 taxpayers reported capital gains. Even though Coinbase at the time had almost six million users! In response to their doubts, the IRS issued a John Doe summons trying to force Coinbase to fork over all user identity and transactional data.

At first, Coinbase ignored the summons so the IRS narrowed down its request for information to those users with more than $20,000 in transaction volume during any one year. They basically wanted the users’ taxpayer ID, name, birthdate and address, in addition to all their trade records. Eventually, Coinbase did comply, giving the IRS all this data on 13,000 of it’s traders.

But as of yet, there are no set rules for cryptocurrency exchanges. If they are located in the US, they can expect a similar summons if a situation like the one with Coinbase reoccurs.

The real challenge with crypto exchanges is that because they are part of the decentralized universe, they are located all over the globe. Users from anywhere can sign up and start trading on most of them. While they operate on a global scale, taxpayers in each region are required to stay legal according to their own country’s rules and regulations (if there are any yet).

How do crypto investors and traders report their capital gains?

For the time being, non-institutional crypto traders are left with 4 basic options for tax reporting:

1. Personally calculate all capital gains

The first option involves personally calculating and reporting all capital gains (if you had any this year!) stemming from every move your cryptos made in 2018. For this option, you’d want to create your own spreadsheet and enter in all your trade information, including:

When you bought the digital asset
How much you paid for it
When it was sold
What was received in return

You’ll also need to understand the cost basis, which is something that is used to calculate capital gains and losses. When buying a digital asset, the cost basis is what you originally paid for the coin, including any fees associated.

When you trade that asset for another crypto or sell the coin for fiat, the price of the coin at the time you trade or sell helps you determine the capital gain (or loss). If the coin is worth more at the time of the trade than when you bought it, you have a gain. If it’s worth less, you have a loss.

All of these gains and losses can be tracked, and if you have more losses than gains, you can deduct the loss. If you have more gains, you’re required to pay capital gains tax.

2. Go rambo style and skip reporting

There are several aspects to this method. For one, you go against the law and risk an IRS audit if in the US, which is not a fun experience. But essentially, it’s tax evasion, a federal crime. If you get caught, at the very least you may owe back taxes, interest and fees. At the very worst, you might owe $250,000 and find yourself in jail.

Even though the IRS is vastly understaffed and underfunded, their main policy for compliance is scapegoating high profile cases. That’s historically how they get the word out that they mean business on a particular ruling. Cryptocurrency is likely to come under fire and be “watched” following a year of ICO scams and fraud. At the moment, however, the US Government is shut down. Still, the risk is probably not worth it.

3. Try out a new crypto tax service

There are several crypto tax services that have popped up and two or them, Bitcoin.Tax and CoinTracking are looking like viable options.

With Bitcoin.Tax, you pay between $154 and $200 annually to have them do all your reporting. Of course you do have to enter all your trade information as you go. They currently offer this service on 2000 different cryptocurrencies. The video below will help you get started:

The second option, CoinTracking, has a great live demo going that you can actually use to calculate everything and get reports as well. Their user interface is very intuitive and you have the choice to manually enter the data yourself or utilize their wallet and exchange import features.

Here’s what entering a trade looks like on their live demo:

4. Find a crypto savvy tax professional

It’s often suggested that individual investors who need help in calculating their gains and losses “see their accountant or tax professional.” However, most tax pros have little to no experience dealing with cryptocurrencies. But there definitely are some crypto savvy tax pros, it just takes a little bit of looking.

If you live in the US, Canada, Europe, Australia, the Middle East or Africa, you can check the Bitcoin Tax guide to find tax professionals in your area. Not all states and regions within these locations have listings at this time, but we’ll probably see more tax experts added in as crypto becomes more globally adopted.

Buying crypto is not a taxable event, but selling crypto and trading crypto are taxable events.

Crypto tax requirements for miners

Miners of bitcoin and other cryptos earn coin as they mine. Thus, it’s treated the same way as if they are being paid a salary and it’s reported as self employment income. The double whammy comes when they cash it out or trade it for another crypto. Here, they need to report their gains and losses the same way as individual investors.

Since mining is their business, they may be able to deduct the computer equipment costs and utility bills associated with their work.

What if I bought something with crypto in 2018?

At this moment in time, if you’re in the US and you buy something using cryptocurrency, then that is considered a “realization event”. In other words, it’s the same as if you made crypto to crypto trade.

Let’s say you purchased a website domain and it cost 1 Bitcoin. When you originally bought that Bitcoin, it cost $5000. The day you buy the domain name, you create a taxable event. When you purchase the domain, say Bitcoin is now at $5500, so your capital gain is $500. Now you owe a capital gains tax on that $500.

It’s the other way around if Bitcoin is worth less on the day you bought the domain. Maybe it tanked to $4000. Then you have a $1000 loss that can be deducted.

Fun Fact: If you have crypto losses, you can use them to offset capital gains, not just on crypto capital gains, but gains on stocks and other assets as well.

When you spend cryptocurrency, it’s the same as if you made a trade.

Find out more

Below you can find the tax agencies for six countries where cryptos are taxed. Check out the links for additional information and updates as cryptocurrency regulations evolve in each region.

If you reside in any of the countries listed below, you can check the Library of Congress Report for crypto tax information. Be advised that this report was published in June 2018 and folks may want to check their own governmental resources or a local tax advisor for any updates to this information.

Argentina
Australia
Belarus
Brazil
China
France
Gibraltar
Iran
Israel
Mexico
Switzerland

Ending notes

If you were a dedicated HODL-er during 2018 you have nothing to worry about. Those that held on to their crypto and did not trade for other coins or exchange for fiat will have no capital gains taxes on their digital assets.

A bit of good news is that many crypto traders saw a loss. Maybe that doesn’t sound like good news, but at least they won’t have to pay any capital gains tax plus they should be able to deduct their losses.

One final note, if you’re a US taxpayer, don’t bother calling the IRS with tax questions, crypto related or otherwise. At this time, all non-essential government entities are shut down. The IRS is not accepting phone calls.

Disclaimer: This is not tax advice. Please do your own due diligence!

Sources:
https://cryptocurrencyfacts.com/the-basics-of-cryptocurrencies-and-taxes/
https://www.nasdaq.com/article/understanding-cryptocurrency-tax-obligations-cm986151
https://money.cnn.com/2018/03/26/pf/how-to-pay-taxes-on-cryptocurrency/index.html
https://www.irs.gov/pub/irs-drop/n-14-21.pdf

Originally published at HedgeTrade.