Do I owe taxes on my cryptocurrency investments?!
(a.k.a. how not to be Martha Stewart or Wesley Snipes)
Look, we get it. You were smart. You got into Bitcoin back when its main uses were buying pizza marijuana and getting stolen from Mt. Gox. But now that it’s hit the moon, you’ve decided to sell some crypto to get that sensible car you’ve always wanted.
But here’s the thing — if you live in the US or are a US citizen, you owe taxes on that cryptocurrency sale. Sold bitcoin for dollars? You owe taxes! Sold bitcoin for ripple? You still owe taxes! In fact, every single sale of a bitcoin or any other cryptocurrency– whether it was for crypto or for dollars, needs to be reported to the IRS.
To pay, or not to pay?
Sure, you can choose not to pay any taxes and you wouldn’t be alone. According to Credit Karma tax fewer than 100 people (out of 250k filers) have admitted to trading cryptocurrency on their US tax returns. However, seeing as my 70-year-old uncle asked me how to buy “Banana-coins” the other day, I’m pretty sure that a lot more than 100 people have bought and sold cryptocurrencies in 2017. Coinbase alone has over 13m users!
So sure, you can join the legion of cryptocurrency tax evaders. There’s probably even an altcoin out there trying to monetize tax evasion in some form. But, if you do that, you’ve forgotten the one rule of life in America — you don’t fuck with the IRS. Remember, these are the guys who took down baseball’s steroid cheats, Al Capone, and Wesley Snipes (#BladeForever). The IRS has already established a team dedicated to tracking down cryptocurrency tax evaders, and they’ve forced some of the biggest exchanges (e.g. Coinbase) to turn over user information on trades. So yeah, you could avoid the taxman for a while, but if you don’t include crypto trades on your return and you’ve been trading they will eventually catch up and wipe away all those sweet, sweet gains.
Wait… do I actually owe taxes this year?
Ok, so you’ve decided to be honest and pay taxes. It’s all right, you can still call yourself a libertarian. We won’t say anything. But, more importantly, how do taxes on crypto work?
First off, you only need to pay taxes if you sold a coin. So, long-term HODLers, feel free to check out at this point and continue daydreaming about that future when cryptocurrencies replace fiat currencies worldwide and are worth $86 trillion dollars like Tim Draper predicted on CNBC last week.
Next, determine if you made money on that coin sale. In other words, when you sold that coin, was the price higher than when you bought it? But the kicker is you need to calculate the value of what you bought in sold in USD at the time of transaction — not units of Bitcoin. It was hard to lose money in crypto last year but if you bought an altcoin at the peak last June and panic sold it right after it dropped maybe you pulled it off. But wait! If you lost money on a coin sale, you can deduct that loss from your tax return (up to $3,000 total, per year). So, looking ahead to 2018 there’s a silver lining from this January slump. Ok, fine, it’s not that great a silver lining. But hey, the next all-time-high is always just around the corner.
Now… how much do I owe?
If you’ve made it this far, you’ve made money on a coin sale. Congratulations on ignoring the haters, FUD-spreaders, Charlie Munger and Jamie Dimon. Now, how much do you owe the government? Well, it depends on how long you held your coin. If you held your coin for 1 year or more before selling, you qualify for the “Long-Term Capital Gains” tax rate, which can range from 0–20%. If you sold your coin before the 1-year mark, you qualify for the “Short-Term Capital Gains” tax rate, which is just a fancy way of saying that you get no special tax treatment.
So how do you calculate your tax bill? How do you know if it’s better to take a large long term gain or a smaller short term gain? Well, you can download all of your trades from an exchange and manually figure out the gains/losses, manually figure out your long term capital gain rate and marginal income tax rate and do the breakeven calculations for every single trade — or you can use TokenTax to do it all for you.* (see below for an example)
We determine the optimal tax lot that should be sold to minimize your tax burden, for every trade, across all of your exchanges and wallets.
At this point, it’s too late to un-sell the Bitcoin you sold in December for $16,000 to buy Tron. You can, however, reduce the tax bill you have to pay in 2017 by utilizing all of the accounting methods available to you and figuring out the best way to minimize your 2017 taxes. That is our specialty at TokenTax — we are the easiest way to make sure you’re paying the IRS the minimum you have to!
And if for some reason you want to pay more taxes in 2017 — maybe to use up those capital losses you’re still rolling forward from the financial crisis– we can help you do that too!
But that’s a conversation for another Medium post.
Check TokenTax out!
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Footnotes and upcoming posts
* For example; take Mike, a self-employed software engineer who lives in NYC and made $100k in 2017. He will have a marginal tax rate of about 45% when you include, federal, state, city, and FICA taxes. This is the rate that his short term capital gain will be taxed at. And his long term capital gains rate would be about 15% (a little higher because of state and local taxes).
Mike sold one bitcoin for $1,000 on December 1, 2017. He had bought two bitcoins in the past, one for $700 a couple of weeks earlier, and one for $100 back in the summer of 2016. If he sells the newer coin, his short term capital gain will be $300. If he sells the older bitcoin his gain will be $900. It seems like a $300 gain would bee better than a $900 gain for minimizing taxes, but let’s take a look at what actually happens:
Taxation breakeven point
Stay tuned for the next posts in our series:
- How much money can you save using TokenTax’s optimization software versus FIFO (Spoiler: Some of our clients have reduced their crypto taxes by over 90%!)
- Made money trading crypto in 2018 but think you don’t owe taxes until April 2019? Think again, you owe taxes by March 31, 2018! (i.e. Next month!)
- How to file crypto taxes with Form 8949 (aka did the IRS just make up a number?)
- Minimizing taxes when you buy altcoins
- Perfectly legal crypto tax tricks and predicting future IRS regulations
- 4 ways crypto is taxed the same as stocks, and 1 way it might be different