Cryptocurrency Taxation: How to Deal With IRS

As a starting crypto trader, you might be concerned about the minefield of taxation and regulations that can be applied to the profits you make from the trading activities. And my first news for you will be not as pleasant as you might think it is. Although this sphere has popped out not a long time ago, it is being more and more regulated nowadays. I would pay huge attention to this topic, considering the news that IRS is conducting the large-scale investigation into Coinbase customer accounts. As Coinbase is one of the world’s largest cryptocurrency wallets and exchanges, this might be very worrying news for cryptotraders who were expecting to hide their earnings or were too lazy to include their profits and cryptoassets into the tax statement. So, there are a couple of issues regarding ownership of cryptocurrencies and transactions, and I am going to have a brief look at these issues and how to deal with them.

First, let’s talk about the declaration of your cryptocurrencies in the IRS form. One thing to point out at the beginning is that the cryptocurrencies are considered by IRC as property, not currency, so the corresponding rules are applied. That means that here two different rates will be applied for long-term and short-term gains and losses. If possession of a coin exceeds one year, the “profit” is taxed at capital gain rates (up to 20% in 2018). Short-term gains are taxed at ordinary rates (up to 37% in 2018). And here starts the most interesting part. The gains are easy to calculate, these are the money you received for the number of coins you sold. A real headache starts when you are starting to calculate cost basis. The IRS requires that taxpayers report the fair market value of bitcoin holdings for the date that the currency was received, not for another time. That means you have to keep track of all your coins that you are buying and selling. Saying to keep track I mean that you have to know how much of which “batch” of some coin purchase you are selling to calculate the cost basis of this deal. It depends on what basis you are selling the coins: First-In-First-Out or Last-In-First-Out. Here is the heads up for you: try to use cointracking app (https://cointracking.info/), so far we find it very useful to track all you transactions and to create a report for the IRS.

Also worth noting that IRS also divides the currencies into convertible and nonconvertible. Convertible are coins that can be freely purchased on exchanges for some “real currency” like USD. As such coins have the “real currency” equivalent, they are susceptible to reporting. Another story is with nonconvertible, the coins that might be purchased only via some small exchanges and only with the help of other cryptocurrencies. To some extent, this might be applied to some ICOs that are not convertible to USD. As for now, there are no laws considering nonconvertible currencies, it means that you don’t have to declare them. For now.

The second main issue that has to be pointed out is the transaction side of trading. By the end of 2017, everything was rather good for the traders: the cryptocurrency trade was equalized to the “like-kind changes”. That meant that you could exchange coins without any taxes and other legal issues. Everything changed from the first of January. Now all coin changes are going to be taxed. Some companies like Coinbase will offer a summary of transactions which can be used to help you file your taxes, but if you withdraw cryptocurrency from an exchange, the exchange can no longer track when happens. So, for you, the best option might be trading on the largest platforms that can make your life easier helping with tracking the transactions.

Well, making off with IRC has never been a very nice thing to do, so you should always keep track of reporting your gains and losses and transactions. To understand all the niceties of the process I would advice you to talk to the taxation consultant and to get the precise comment for your specific situation. But, hopefully, here you read the basics that will help you not to get in trouble in future. So, I wish you good luck in trading and dealing with IRC reporting your profits! Reed more about cryptocurrencies.

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