On 29 Mar, 2018If you are investing in cryptocurrency it’s important to understand how crypto gains and losses are taxed.With taxes due in a few weeks now might be a good time to get understand of the cryptocurrency taxation laws in the United States. If you live outside the U.S. make sure you understand the cryptocurrency tax laws in your own country.
Before we dive in I just need to say this. Nothing you are about to read constitutes written tax advice. In no way can any of the information in this article or on this website can be used to avoid tax penalties or interest imposed on you. Please consult your own tax professional before filing your tax return.
Now that that’s over with let’s get into it.
The IRS and Cryptocurrency Taxation
So the IRS likes money. But until 2017 not enough people were investing in cryptocurrency for them to take it seriously. Now prices are higher and a ton of people have way more money than they used to. So the IRS is reasserting the rules they established for virtual currency back in 2014.
IRS Notice 2014-21 lays out the general tax guidelines. The major takeaways are:
- Crypto-assets are considered property for tax purposes (not a currency)
- A taxpayer has gain or loss when exchanging a crypto-asset for other property
- The gain or loss is capital in nature (for most taxpayers)
- Mining cryptocurrency results in ordinary income
To learn more about the taxability of capital gains I suggest reading this article.
So My Crypto Gains Are Taxable Even If I Didn’t “Cash Out”?
The answer is yes. Point number two above says it all – crypto to crypto exchanges result in capital gain or loss. So remember that time you bought Tron with that Bitcoin you’ve been holding for a while? Yeah, that resulted in a gain and you’re going to have to pay taxes to the government.
Now you have to ask yourself a few things:
- When did I buy the coin I am selling?
- How much did I originally buy it for?
- What price am I selling at?
Answer these three questions and you can calculate your gain (or loss). This has to be taken into account every time you sell. In other words, every transaction in crypto results in a taxable event.
So Now What Do I Do?
Well if you made a lot of trades you have two options:
- Gather all the relevant information to the best of your ability and report the gains or losses on Schedule D of your tax return
- Use a service that provides cryptocurrency taxation analysis and can do all of this for you
As it regards point number two I don’t have any recommendations (I don’t trade often). But it is essential that you do your research and make sure you are using a safe service. Remember, never give your private keys to anyone.
Another tip. You can extend your tax return for six months. However, you still need to pay in by April 17, 2018. It’s an extension to get the information together and put it on the form. It is not an extension to pay your tax.
If you owe tax and don’t pay in by the due date you will be subject to penalties. There is a way to make sure you don’t get penalized – to learn more click here.
If you have any more questions leave a comment below and I’ll be sure to get back to you!
