Best Cryptocurrency Trail Guide – Updated
This guide covers crypto taxes for U.S. citizens. We’ll look at what exactly to report, how taxes are calculated and how you can minimize your tax increases. We will also look at how you should generate and file your crypto tax report.UPDATE: This guide has been updated according to the latest guidelines issued by the IRS on October 9, 2019.
How crypto conversations work in the United States
Cryptocurrencies such as Bitcoin and Ethereum, are considered property under federal tax law in the United States 1. This means that the same tax principles used for real estate transactions can also be used for trading or selling cryptocurrency. Property transactions are subject to capital gains tax – as well as cryptocurrency – and must be reported on Form 8949. Capital gains occur when you conduct any of the following transactions:
Sell cryptocurrency for fiat currencies, such as USD
Use cryptocurrency to pay for goods and services
Cryptocurrency trading for other cryptocurrencies
These transactions do not result in capital gains:
Donate cryptocurrency to a tax-exempt charity or organization
Transfer cryptocurrency between wallets you own
Buy cryptocurrency with fiat currency
Attract a small amount of cryptocurrency (under $ 15k)
Lend me your coins
Cryptocurrency received from mining, hard forks, air, etc.
Receiving crypto from mining/fork/staking/loans/airdrops and others is seen as fixed income and should be reported in your annual tax return – only this crypto sale is reported in your capital gains report. In the income tax chapter, we will go over the tax implications of cryptocurrency adoption in more detail.
The US also requires investors holding fiat funds in excess of $ 10,000 in any foreign exchange (such as Bitmex, Bittrex, etc.) to report it under FBAR and FATCA.
Capital gains tax on cryptocurrency
Capital gains tax, when used for cryptocurrency, is pretty easy to make. When buying a valued cryptocurrency, the profit from its disposal is considered capital gain. On the other hand, if the cryptocurrency is depleted, the losses incurred on disposal can be deducted from other capital gains to minimize tax liability 2.
It should also be noted that capital losses can be deducted against any type of capital gain – not just cryptography. For the former, if you sell your home for profit then you can deduct any loss from the crypto trade to reduce your taxable profit.
The capital gain is declared on Form 8949. You need an accurate record of each cryptocurrency transaction (date, amount, fees, fees) to calculate your capital gain correctly and to ensure you do not pay more on your taxes. This is usually the most difficult part of filing your crypto tax and you may find it easier to use crypto tax software for it.
Short-term & long-term capital gains
The amount of tax you will pay depends on how long you have held your card.
Cryptocurrencies sold within one year of purchase are subject to short-term capital gains tax. Short-term benefits will be added to your income for tax purposes and subject to your regular income tax rate 3.
Cryptocurrency sold after one year is subject to long-term capital gains tax of 0%, 15% or 20% depending on your taxable income and filing status 3.
Long-term capital gains tax is generally lower than short-term capital gains tax, so you are interested in not selling cryptocurrencies you bought in the past year.
Calculates the capital gain for a crypto transaction
Capital gain is calculated by subtracting your purchase price (reasonable cost) from your selling price. This gets complicated as you trade more and more frequently. If you bought 10 BTCs in 3 separate transactions – all at different costs, how would you determine which BTC was sold? This is where accounting methods like FIFO and LIFO enter the IRS recommends using FIFO but you can also use LIFO. It’s best to consult a tax advisor if you want to use LIFO as it’s not easy to switch to it unless you’ve used it in the past.
There is also a special variant called Specific Identification that can be used in conjunction with FIFO / LIFO to gain more control over the assets for sale. Let’s look at an example to see a bag