It is no secret that many cryptocurrency traders shrug off the task of reporting their capital gains and losses from crypto investments. This is due to ignorance, or assumption of their jurisdiction’s ignorance, of crypto trading. These tips apply with the IRS (United States) tax laws, if these do not apply to you, it is recommended to inquire with the tax governing body or professional where you reside.
It is not the IRS’s responsibility to prove your taxes are accurate, it is yours!
A lot of investors assume that the IRS does not know enough about cryptocurrencies to prove you falsely reported taxes. Even if this is true, you may be audited which makes it entirely your responsibility to show them you handled your cryptocurrencies in the manner you reported.
The newly issued 2019 US income tax form begins with the question: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Answering this question will already put you on the radar if the IRS suspects false tax reporting, which is why it is important to file as accurately as possible.
Taxable crypto events
There is plenty of confusion on which events are taxable in crypto, the money flow can get complex as currencies are traded, moved, airdropped, or gifted.
These actions would be categorized as a tax liability to report:
• Trading from crypto to fiat
• Trading from crypto to crypto (For example, BTC to ETH)
• Using cryptocurrency to pay for an item or service
(Note: When no fiat is involved in the transaction, such as buying Ethereum with Bitcoin, you must calculate the fair market value of the assets at the time of purchase to report your capital gains or losses)
These actions would NOT be categorized as a tax liability to report:
• Sending cryptocurrency as a gift (As long as you do not exceed the gift tax exemption amount)
• A transfer between two crypto wallets (This includes exchange wallets, as long as no trades took place between the transfers)
• Purchasing crypto with fiat (Keep in mind that you only realize gains/losses when you sell your Bitcoin for fiat, or another cryptocurrency. If you hold for longer than a year, you can realize long-term capital gains. Any shorter and you are subject to short-term capital gains.)
Crypto losses can offset gains in other markets
Losses (and gains) accrued are also combined with gains and losses from other capital assets such as stocks. For example, if you profited $15,000 from stocks, but lost $16,000 in the cryptocurrency market, your result would be a net capital loss of $1,000. (If there are no other income gains from elsewhere.)
Now, let’s say you did not gain anything from the stock market, and your total loss for the year is the $16,000 from cryptocurrencies. The maximum amount you may claim is $3,000 on your tax filing. This does not mean you must only report $3,000, it means your tax deduction will only reflect a $3,000 loss.
Next year these losses are also applicable as carry forward losses. For example, in the year following the $16,000 loss, the remaining $13,000 that was not claimed may be reported for another $3,000 loss. You may continue to do this yearly until the net profit/loss is $0!
(Note: Capital gains do NOT rollover to the following years. Any capital gains must be reported in the year they are obtained)
You may amend false reported crypto taxes from previous years
If you did not properly file crypto taxes in previous years, you are able to amend those tax records. The IRS has the ability to audit as far back as 2013 for non-compliant crypto tax reporting.
1099-K Forms are not enough
Most crypto exchanges, or fiat gateways such as Coinbase, provide a 1099-K form to assist investors with their tax filings. These forms only report the total dollar amount of transactions that occurred from your account. This document is not meant to be included with your tax filing. The 1099-K does not portray realized gains or losses. Moving crypto to different wallets, exchanges, or anywhere, will make the figures more inaccurate.
As an example, let’s say you buy $1,000 of Bitcoin on Coinbase. Coinbase now records that $1,000 of crypto has entered your account. You send that Bitcoin to Binance, and trade it to a value of $2,000. You then send the entire balance back to Coinbase. Now, Coinbase has a record of you owning $3,000 of Bitcoin. Since the taxable events happened on Binance, it is impossible for the Coinbase 1099-K to reflect how that $2,000 of Bitcoin came to be. The 1099-K will simply add the $1,000 you bought with the $2,000 you sent back to it.
Typically, exchanges offer a (.csv) file of your trading history on that platform. Using Microsoft Excel to view the file, you may see each traded asset, the quantity, and date that each trade took place. This will help you manually record your gains and losses for your bitcoin tax reporting.