It doesn't matter whether you're a die-hard crypto trader or whether you occasionally dabble in crypto investing. If you've traded cryptocurrencies during the year, tax season can get tricky. In case you've been under the impression that crypto transactions are anonymous and you don't really need to worry about paying taxes on them, think again.
The IRS had asked top crypto exchanges like Coinbase for information on their US-based customers. What's more, they actually used this information to send out letters to suspected tax evaders. In October this year, the IRS also issued new guidelines for crypto investors, further clarifying doubts and ambiguities surrounding crypto taxes.
This is all to say that the IRS is taking crypto taxation very seriously. So if you've been less than 100% when it comes to filing your crypto tax returns, this is the time to make up for it. If you're feeling overwhelmed and are not sure where to start, sit with your CPA and check whether they're up for the task of handling your crypto taxation. You can ask them these 7 questions to make sure they're up-to-date with the latest in crypto taxes and can help you sort out your crypto tax woes in time.
1. What kind of tax am I expected to pay on my cryptocurrency?
The IRS treats cryptocurrency as property which means crypto transactions are treated in the same way as property transactions. To put it simply, if you sell crypto within one year of buying it, you will be subject to Short-term Capital Gains Tax (SCGT). If you wait for over a year, you will have to pay Long-term Capital Gains Tax (LCGT).
2. I have some transactions where I didn't sell my crypto for regular currency. I sold some Ethereum and bought bitcoin instead. Do I need to pay taxes for such a transaction?
This is a doubt that a lot of people have. If you didn't technically "sell" the cryptocurrency, do you still need to pay capital gains tax? However, the IRS is quite clear about this. "Disposal" of cryptocurrency constitutes a taxable event. Disposal can mean a number of different things — from selling crypto to exchanging crypto for other cryptos, using crypto to purchase other goods, or even gifting crypto.
So how do you calculate your capital gains in this case? When it comes to crypto-to-crypto exchange, you need to keep accurate records of all your transactions. If you haven't done so yet, you can use crypto tax software to get your records in order. In this case, the fair market value of the crypto that you exchanged as on the date of the transaction will be the sales proceeds. You can then deduct the cost of purchase from the sales proceeds to calculate your capital gain.
3. Some part of my salary is paid to me in bitcoin. How do I report this income given that the price of crypto keeps fluctuating?
The salary you receive in crypto has to be added to your taxable income when it comes to calculating your taxes. The IRS follows a fairly straightforward rule here — the fair market value of the bitcoin on the date that you received it is what will be added to your gross income. In this case, it's important for you to maintain accurate records as to when the cryptocurrency was credited to your account.
4. I am mining cryptocurrency. Do I have to pay self-employment tax? What expenses can I deduct when I report my taxable income?
The answer to this depends on the nature of mining. For instance, you might be mining bitcoin but as an employee working for someone else. And the bitcoins mined are not in your name. In this case, you would be treated as an employee and would not be subject to self-employment tax.
You might also be mining cryptocurrency but as a hobby, rather than a full-time business. In this case, it is not a self-employment activity and you wouldn't have to pay self-employment tax. At the same time, you wouldn't be able to deduct any mining-related expenses either.
If you're mining cryptocurrency in your own name and as a business, you would be considered self-employed and expected to pay self-employment tax (SECA). You would also be able to deduct certain expenses (hardware and software costs, electricity and utility bills, etc) from your profits in order to determine your net taxable income.
5. The IRS doesn't specifically talk about the tax treatment for cryptocurrency that you receive in a hard fork. Do I need to disclose this in my tax return?
Most experts believe that the fair market value of the coins received on the date of the fork is ordinary income and is taxable. Plus, this fair market value also becomes your cost basis when you end up selling the forked cryptocurrency.
6. What if I haven't maintained accurate records of my crypto transactions? What can I do to remedy the situation now?
For starters, you can use crypto tax software such as Koinly to help you organize your transactions and maintain accurate records. If there are still some discrepancies (for instance the exchange you used is no longer operational), utilize an estimate and explain why you have used such an estimate in your tax returns. This will safeguard you from a hefty penalty in case the IRS decides to pursue the discrepancy.
7. I have not been reporting my crypto investment in my tax returns for several years. What can I do about it now?
Since the IRS is cracking down on crypto tax evasion, you need to act quickly. In all likelihood, you will need to file an FBAR, which would include making unprompted disclosures, amending past tax returns, and filing missing returns.
These are some of the most common questions that crypto investors are currently plagued with and your CPA should have strong, confident answers for these. If you're an active crypto trader and you feel like your CPA isn't as well-versed in crypto tax matters as they need to be, hiring a crypto tax accountant might be a good idea.
Read more about Koinly in this review on Blokt!