Did you profit from cryptocurrency last year? Here’s what you need to know about taxes.
2017 was an amazing year for cryptocurrency, with annual gains of 5,000 and even 10,000% normal across the board for many of the top 100 coins by marketcap.
If you profited from the beautiful bull run of 2017, you can’t sit easy just yet. This much money cannot escape the radar and the pockets of Uncle Sam. All US citizens, or citizens of any country for that matter, are first and foremost taxpayers.
For those who have been dealing in cryptocurrency years earlier and did not report any taxes, read on because this is for you too.
In December of 2017, a bill was passed that directly addressed the situation, enforcing rules that would affect everyone that participated in the exciting world of crypto last year.
No matter how you traded crypto last year, you need to address the tax situation at hand.
If you’ve already filed taxes, simply submit an amended tax return including your cryptocurrency info as the IRS will be much more forgiving if you do this than if you ignore the situation altogether and not file anything.
Let’s go on to answer some of the most common questions for those who have dealt in digital currency last year.
Does the IRS view cryptocurrency as money?
Cryptocurrency is not treated as currency like one that is FIAT government backed like it would be if you were trading Forex, but as a virtual currency, which in the eyes of the IRS is considered property.
The good news is that property isn’t taxed as harshly as currency, but the bad news is that it can get complicated. The IRS has released resources directly addressing how they view cryptocurrency like Bitcoin, Ethereum, and altcoins.
Best IRS resources to refer to regarding cryptocurrency?
Two good resources are the IRS notice 2014-21 and the H.R. 3708.
In March of 2014, the IRS posted notice 2014-21, addressing cryptocurrency as it specifically relates to existing tax principles. Read it over, refer to it, but realize that it’s not the definitive guide to crypto taxes and does not cover everything.
In December 2017, a new bill, the H.R. 3708 was passed that directly addressed cryptocurrencies, changing the game most significantly in its new ruling that every cryptocurrency trade, even from coin to coin with no cashing out to USD, is a taxable event.
The only good news from this bill is that it allowed those who made de minimis gains (i.e., less than $600) to be exempt from the need to report taxes. Unfortunately, many of us profited much more than $600, and this bill mandated tax reporting for us.
I used Coinbase years ago and have already cashed out my gains, unreported. Should I be worried?
The IRS never liked Bitcoin users, especially early ones who were mostly anarchist cypherpunks who valued privacy and hated anything to do with government, especially taxes.
A series of John Doe summons were issued, for those who don’t know what that is, directly from the IRS document, a John Doe summons “allows the IRS to get the names and requested information and documents concerning all taxpayers in a certain group” and “can be a useful tool when trying to obtain information like a list of investors in a certain tax shelter” (source).
In a win that benefited the users of Coinbase, the fourth and most recent John Doe summons in mid-2017, the IRS loosened up its strictness on lesser dollar amounts, stating that only users who had transactions over $20,000 must agree to have their information turned over to Uncle Sam.
What about anonymity? Isn’t the whole point of cryptocurrency to be anonymous?
Even though cryptocurrency promises privacy, multiple sources prove that Bitcoin is more trackable than you think, and just about everyone who was serious in the game began their altcoin swapping game in extremely traceable third parties such as Coinbase and Gemini.
Regulators have even coined the phrase “prosecution futures” to refer to Bitcoin transactions, meaning that with enough time, the offender, whether he’s a taxpayer or a criminal, will be identified through a breadcrumb trail of transactions on the blockchain if he used Bitcoin.
With just about every ICO now employing KYC (know your customer) and being scrutinized by the SEC, it’s nearly impossible to profit from any coin or token sale without being obligated to pay taxes.
In fact, the IRS is specifically making effort to tax those in the crypto space because of the largely unreported billions of dollars in wealth created in such a small amount of time.
OK, so every crypto to crypto trade is a taxable event. But each one is worth different amounts. How is the value of the trades calculated?
Current value against USD at the time of trades. Not Satoshi value. Not the value on the platform, but the market value of the coin to USD at the time of the trade.
That’s a huge headache to track every trade. Can’t I just pay taxes when I cash out to fiat?
If you do cash out an amount, say $100,000 to fiat and only pay taxes on that, and the IRS audits you, you will be asked to prove exactly how you received the $100,000, which will likely include a detailed record of every trade made in between when you put money into Coinbase or Gemini and when you pulled it back out.
Does the time frame which I held my cryptocurrency make a difference?
Since it’s considered property, cryptocurrency falls under capital gains tax.
Capital gains tax falls under 2 major categories: short term and long term. Consult a tax professional for the exact numbers in your state or country, but generally speaking, short-term capital gains taxes are taxed at a higher rate than long-term capital gains tax, which is why many crypto users are HODLing for tax purposes.
Many crypto investors, including some of the biggest whales from the United States, are drawn to Puerto Rico as a tax haven. There must be truth to this assumption since some of the richest and smartest are making this move. For this, we suggest you DYOR; this post from The Escape Artist is a good start on this topic.
Other possible ways to save?
In addition to speaking to your tax professional, hopefully, one that is well versed in cryptocurrency regulations, make sure you’re paying taxes based on your unique status, which includes not only your income based tax bracket but also a status that can be beneficial like Trader Tax Status (TTS).
Basically, if you’re a high volume trader, you can fall under Trader Tax Status, which will give you more favorable breaks on reporting losses in certain amounts, lowering your overall liability when everything is tallied up, even if you profited overall.
Trading cryptocurrency at a high volume can be a headache, so many people found assistance in the form of trading software like GunBot as part of their strategy in hedging against human error and emotion and profiting off of pure technical analysis.
As 2018 and further years carry on, be sure to stay up to date and keep taxes in the back (or front) of your mind before making money moves, after all, we are but individuals currently at the mercy of our governance, but it’s up to us to determine how much control they really have over us.
Necessary disclaimer: Although this article is meant to steer you in the proper direction, we are not tax professionals, just fellow citizens addressing a confusing and often avoided situation in the world of cryptocurrency: taxes! Therefore, we are not making specific recommendations on acting for cryptocurrency taxes. Please consult a tax professional for detailed answers on your personal situation!