The young cryptocurrency industry comes with numerous technical nuances that can be challenging to keep up with. Further compounding the issue is the upcoming tax season and how to file your taxes for digital assets properly.
Although many regulations on digital assets in the U.S. are not definitive, there are some useful tools and rulings so far that can assist you with the daunting complexity of correctly filing your taxes.
Classifying Digital Assets
Several rulings throughout 2018 have helped to classify some digital assets into specific areas. However, the IRS has made only a few remarks on digital assets, mainly prescribing that investors who made profits on Bitcoin and other digital assets last year were required to report them as capital gains. The IRS currently identifies virtual currencies as property rather than currencies, so tax rules that apply to property transactions would, in effect, apply to cryptocurrencies.
Similarly, although the SEC has declared that most ICOs were securities in the 2018 ICO craze, they have not explicitly identified a comprehensive list of them. As such, it is prudent to report any gains on ICO sales as outlined by companies specializing in crypto tax services to avoid problems with the IRS. The SEC has made public statements that Bitcoin — and most likely Ether — are not securities, but the status of the remaining coins in the sector is still unclear.
TurboTax provides some useful basic guidelines for correctly reporting Bitcoin, which are as follows:
- Bitcoin received as payment for goods/services needs to be converted to USD and reported as income.
- Mining rewards from Bitcoin must be converted to USD and reported as income.
- Bitcoin held as capital assets are taxed as property.
It becomes much more complicated if people hold onto the asset received as income as a long-term store of value (which would classify it as both income and a capital asset), especially how much they can claim as losses for deductions if they lost significant value throughout the 2018 bear market. According to Credit Karma, Bitcoin investors lost a total of $1.7 billion in realized losses in 2018, and a large portion of them do not know how to report such losses.
Last year, when there were even fewer guidelines and tax services, only a portion of people actually reported their cryptocurrency holdings with their taxes. This year, the IRS is likely to take a more meticulous approach, particularly for those with vast cryptocurrency holdings, although the ongoing government shutdown may throw a wrench in that too.
Keeping track of all of your trading activities throughout 2018 can be a headache, especially considering the complexities and loopholes with reporting losses for tax deduction purposes. However, there are numerous tools and resources in the section below that can help you.
Useful Tools for Properly Filing Cryptocurrency Taxes
Coinbase — one of the largest US-based digital asset exchanges — recently integrated with TurboTax to help US citizens file taxes on crypto holdings. The exchange also provides a Tax Resource Center which offers some general information on government agency rulings, FAQs, and how to report profits/losses from trading on Coinbase.
Other resources — like Cointracking.info — enable users to import all of their transactions from their crypto wallets and provides guidelines for determining what you owe. Investopedia also provides a useful starting guide for approaching Bitcoin taxes, although it is from last year.
For crypto and blockchain-focused businesses, Libra offers services for producing audit-ready information for crypto-related products. Crypto tax specialists such as Azran Financial and CryptoTax Advisors also specialize in tax services for individuals and businesses.
Some automated tax service solutions are also available for crypto holdings, including CryptoTrader.Tax, which produces the necessary documents before passing them on to tax professionals to finalize and submit.
It’s pretty clear that the tax environment for digital assets still has a lot to be desired, mainly stemming from the lack of definitive guidelines by government institutions. Moreover, using crypto tax specialists can be an expensive and cumbersome process, although they are much more likely to reduce your liability than doing your own taxes if you have a complex trading history.
If you primarily received small amounts of Bitcoin as payment or used it as an investment, then filing your capital gains/losses or income with the legacy cryptocurrency shouldn’t be too difficult to do on your own. Conversely, if you own multiple cryptocurrencies, receive payment in various cryptocurrencies, or trade regularly, tapping into specialized software and tax specialists are probably the most prudent move.
Over the next few months leading up to the April 30th tax filing deadline — and hopefully, once the government reopens — more tools and services should continue to emerge for cryptocurrency investors. Perhaps the IRS will also finally provide some better guidelines for properly filing taxes on digital asset holdings.