How to File Your Cryptocurrency Taxes Like a Professional
Taxes are easy if you have the right systems in place.
There is a lot of confusion when it comes to taxes on cryptocurrencies. I’m not a tax professional but spend a lot of time keeping up with the latest tax information. Personally, I don’t like to owe the IRS more than I have to so I pay my taxes.
One thing I do every year, I use a tax professional when I file my taxes. They understand the tax laws better than I ever will.
Additionally, if the IRS says something is wrong with my taxes, my tax accountant will handle the discrepancy. That is why I pay my tax accountant. They can refile what was not correct.
Bitcoin was created in 2009 and the IRS took a few years to catch up. The IRS declares cryptocurrencies are treated as capital assets like stocks or bonds. The IRS does not see your cryptocurrency as money which was the original purpose. As a result of this, every transaction you make with cryptocurrencies could be a taxable event.
There are rumors floating around that you have to have so much in gains after a cryptocurrency transaction before claiming it to the IRS. I would rather file my gains and let my accountant figure that out. You shouldn’t listen to rumors which could cost you a hefty fine one day.
File your taxes and don’t cut any corners.
The IRS commissioner Charles Rettig said over $1 trillion does not make its way to the IRS every year.
Ohio Senator Rob Portman is working on a bill for more cryptocurrency disclosure.
Companies such as Coinbase report transactions to the IRS. Trying to avoid what cryptocurrencies you bought and sold is not as easy as it was before when the IRS was not tracking this information. The IRS may also have other agreements with other cryptocurrency exchanges. It is best to pay the IRS what they are owed.
About two years ago, the IRS was sending letters to cryptocurrency investors who under-reported their earning.
Cryptocurrency taxable transaction
To help you know what is a cryptocurrency transaction, this example may help you understand better.
Let’s say you bought $10 worth of Bitcoin and held it as it rose in value to $500. If you used the bitcoin to buy $500 worth of groceries, you’d owe capital gains taxes on the $490 in profit you’d realized. You did not sell the Bitcoin to anyone but sold the Bitcoin in a transaction.
The IRS sees this as a taxable transaction.
Cryptocurrencies can not be treated like money which was the initial idea. People hold on to cryptocurrencies like an investment to make a profit.
“I assume [the IRS] decided this because most people hold crypto as an investment, and we tax the appreciation on capital assets held as an investment,” said Jeff Hoopes, an associate professor at the University of North Carolina and research director of the UNC Tax Center.
When you have a gain, this is considered a taxable transaction
You only owe money if you sell, trade, or spend your cryptocurrency and you realized a profit. If you sold or trade your cryptocurrency for a loss, you do not owe taxes on the transaction.
Write off your cryptocurrency gains. You may be able to use part of your cryptocurrency transaction to write off some of the loss on your taxes.
If you bought Bitcoin when it was $1000 and sold the Bitcoin when the price was $700. You could use the $300 difference to offset your gains in other investments.
Short-term versus Long-term gains
To make this simple to understand, you owe taxes on your cryptocurrency gains based on your personal income and on how long you held the cryptocurrency.
Short-term gains. When you hold your cryptocurrencies for less than a year for a profit, you owe gains at a higher tax rate (approximately 20%).
Long-term gains. When you hold your cryptocurrencies for more than a year for a profit, you owe gains at a lower tax rate (approximately 15%).
Cryptocurrency mining. When you mine cryptocurrencies or earn cryptocurrencies from a company, the income you earn is taxed as your regular taxable income.
The IRS states that any income you earn is considered taxable unless exempt by law.
“When a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.”
As a cryptocurrency miner, you may be subject to self-employment tax. The earnings you make as a cryptocurrency miner consider you working for yourself. “Generally, gross income derived from carrying on a trade or business less allowable deductions”.
Receive cryptocurrencies as an employer. As an employer or independent contractor who receives cryptocurrencies as income for services performed, this “constitutes self-employment income and is subject to the self-employment tax.”
Reporting payment in services for cryptocurrencies worth $600 or more. A person who makes a payment for services to a business or trade of $600 or more in a calendar year, you must report the information to the IRS. The information is reported on Form 1099–MISC, Miscellaneous Income. The Fair market value on the day of the transaction is used for the cryptocurrency.
Cryptocurrency tax software I use
Calculating the tax value on the transactions for your cryptocurrencies is not easy. The program I use to make it easier is CryptoTrader.
This program pulls your transactions from your cryptocurrency exchange and compiles the information showing your gains and losses.
Once you enter your information, the numbers are pulled very quickly. Many top cryptocurrency YouTubers, such as BitBoy and Cryptocurrency YouTuber, also use this program.
By using this referral link, you receive a 10% discount on your CryptoTrader purchase.
Once you have the information, you can use it with your tax program or hand it to your tax accountant.
Final thoughts
Do your best to report your cryptocurrency trading to avoid receiving a letter from the IRS for underreporting.
You can make money with cryptocurrencies, but you also have to pay your taxes.
See these other articles on cryptocurrencies:
Disclaimer: This article contains an affiliate link. If you decide to make a purchase, the writer may receive a commission. You will not get charged any extra fees for your purchase.
Tom Handy is a top writer on Medium, former Quora writer, and father of two kids. He retired from the Army and sits on several non-profit boards. You can find him on Twitter @tomhandy1 and Life is Like a Game.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
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