Depending on what country you live in, your cryptocurrency will be subject to different tax rules. The questions below address implications within the United States, specifically, but similar issues arise around the world. As always, check with a local tax professional to assess your own particular tax situation.
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 rules similar to other forms of property like stocks, bonds, real estate and gold.
You need to file taxes for your trades when you trade one coin for another or whenever you sell your crypto. Simply buying and holding cryptocurrency is not taxable; you only realize your gain or loss when you sell it.
How Do I Calculate My Gains and Losses From My Crypto Trades?
To calculate your capital gains and losses on your crypto trades, apply this formula:
Fair Market Value – Cost Basis = Capital Gain / Loss
Fair market value is simply 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 U.S. dollars at the time of the sale.
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.
Let’s say you bought 5 ETH 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 $1,200 (3 * $400). You sold the coins for $450 total. This is your fair market value.
Doing the math: $450 – $1,200 = -$750.
You incurred a $750 capital loss. You would file this loss on your taxes and it would reduce 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 both a “buy” and a “sell” for tax purposes.
A Coin-to-Coin Trade Example:
So, let’s say instead of selling your 3 ETH for U.S. dollars, you traded your 3 ETH for X amount of bitcoin. In this case, you have still triggered a taxable event, but now your fair market value is a little bit harder to calculate. You need to know what the value of the 3 ETH was in USD at the time of trading to calculate your loss on the transaction.
Using bitcoin tax software to crunch all of these historical numbers can be a huge time saver.
What Do I Do With My 1099-K from Coinbase, Gemini or Another Exchange?
A 1099-K is a form that reports 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 with 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 very large and not at all representative of how much money you put into Coinbase or how much money you owe or do not owe in Coinbase taxes. The IRS is aware of this. Tax documents from exchanges like Coinbase will also be completely inaccurate if you ever moved crypto into other wallets, exchanges or other platforms differing from the one that sent you the 1099-K.
In order to properly report your crypto taxes, you need to capture your holistic crypto activity across all exchanges and platforms and complete a 8949 form.
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 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 $20,000 stock market gain. Therefore, you would pay no taxes on your stock market activity. If you are at a 25 percent 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 BTC and ETH. 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. If you made $50,000 on the year in income, only $48,000 of that income would be taxable.
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 handled 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 2, 2018, that one of its core campaigns and focuses for the year is the taxation of virtual currencies.
When Do I Owe Taxes on My Cryptocurrency?
The following examples 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 in which you incur a tax liability that you must report.
- Trading cryptocurrency to fiat currency like the U.S. 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 for longer than a year, you can realize long-term capital gains (which are about half the rate of short-term gains.) If you hold for less than a year, you realize short-term capital gains and losses.
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 look up previous USD values manually or upload your trades into specific crypto tax calculators to automate the process.
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, as noted above, the IRS has explicitly stated that the taxation of virtual currencies is one of its 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 really is not that difficult of a process to report your crypto trades. If you have questions regarding IRS audits or your specific situation, it can be helpful to connect 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.
This is a guest post by David Kemmerer, co-founder ofCryptoTrader.Tax. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc. This article is for informational purposes only and should not be considered tax or accounting advice. Always seek guidance from a tax accounting professional when assessing your individual tax situation.