A guy posted a story yesterday on reddit looking for advice for his situation. He stated that early in 2017 he opened an account on Coinbase and invested $5,000 in crypto. With the massive gains crypto had the past year and flipping between some x10 coins, he was able to grow his portfolio up to $880,000 in December 2017. Then he got the 1099-K Coinbase report which he posted here https://imgur.com/a/cpPwR9u following with a question “is my life over?” The full post can be found here.
How much you owe in taxes if you have bitcoin?
In this article, we will talk about what can happen if you don’t pay taxes on bitcoin or other cryptocurrencies.
In January 2017, bitcoin was trading near $1,000 then in December, the price hit near the $20,000, while other cryptocurrencies followed even with bigger gains.
For any individual who overlooked the normal crypto-slogan to “HODL,” to hold on your crypto, and chose to cash out, those gains are viewed as income by the IRS. In the event that you sold crypto-coins or utilized crypto to purchase anything in 2017, you most likely owe the IRS taxes.
And not paying you might have consequences.
Ryan Losi, a certified public accountant and the executive vice president of Virginia accounting firm PIASCIK explains that in the event that IRS finds you did not report or under-report your income when you file the taxes in April, “there is a failure-to-pay penalty of 0.5 percent per month, starting after the month in which it was due”Then there is a failure-to-pay penalty of 5 percent on top of that.” , Losi says.
Here it is what you need to know to avoid penalties about bitcoin taxes.
1. IRS is trying to catch up with Crypto
Because of the anonymity nature of crypto, the number of people owning cryptocurrencies is unknown. However, Coinbase had an estimate of 13 million users back in November 2017 when bitcoin and cryptocurrencies gained a lot of attention. But according to Bloomberg the number of users trading on Coinbase has fallen by 80%.
Unlike with other investments that you are issued a 1099 form (a copy it is sent to the IRS too) to help calculating tax obligations, this isn’t the case with Coinbase. Coinbase will give 1099 forms to “certain business customers” and “customers that have received at least $20,000 cash for sales of virtual currency related to at least 200 transactions in a calendar year,” according to the Coinbase customer support page.
Without these form would be difficult for IRS to find out about your crypto taxes. Since it is difficult for the IRS to discover an individual whether they reported their cryptocurrency trading activity. Appears that barely anyone is paying taxes on their crypto-gains. In 2015, just 802 Coinbase clients declared to the IRS regarding bitcoin gains, despite the fact that Coinbase had 2.9 million users in December 2015, as indicated by Milne’s report.
But recently, the IRS has found a way to identify people who are profiting, and not declaring. In 2016, the IRS brought records from Coinbase, and a court enforced the company to reveal data on around 14,000 users who have “either purchased, sold, sent or got at least $20,000 worth of bitcoin in a given year,” CNBC reports.
Regardless of whether you aren’t a Coinbase user, you’re committed to reporting, and each U.S. citizen can possibly be audited by the IRS. In 2016 the IRS analyzed 0.6 percent or 1.2 million of the 193 million tax forms reported that year.
2. You owe taxes if you sell or spend crypto, But if you Hold you don’t
In 2014, the IRS first issued official direction on the best way to treat cryptocurrencies, which noted that they are viewed as property.
So in the event that you cashed out of bitcoin in any way like buying a pizza or a Lambo you were creating a taxable event. And you’re then in charge of paying taxes for the gain you made between the price you bought and the price you sold or spent it.
For example, if you paid with bitcoin to buy a house, whatever your way for doing this was, the way IRS thinks about it is that you sold you bitcoin for cash and then you bought the house using the cash. And now you have to pay taxes upon how much appreciated bitcoin since the time you purchased it until the time you bought the house.
This gain can have different tax rates according to the time you bought and sold or spent the cryptocurrency. If you held it for more than a year the capital gain tax can range from 0 percent to 20 percent you can use Form 8949 to report it. If you held crypto for less than a year you pay normal income tax.
On the other hand, if you bought cryptocurrencies and held you don’t own any taxes since there is no triggering of gain recognizable. Like with stocks, bonds or some other venture on which you may pay capital increases, you just need to pay after you sell or trade virtual money.
3. It’s smart to keep your own records when you buy, sell or spend
It is important to keep your own records when you buy or sell or spend cryptocurrencies to be able to report correctly when you file your income report.
For example, if you by a digital currency for $10 and sell it for $20 you have to report only $10 gain which is the taxable amount, but if you can not provide documentation about your purchase at $10 the taxable amount will be $20. So keeping documentation is extremely important.
Coinbase users can create online a Cost Basis for Taxes report.
4. Deduct taxes when you suffer losses
As indicated by charts in CoinMarketCap.com, the bitcoin price went in one direction in 2017, in the upside. In any case, you lose on any coin you can use these losses to balance taxes you may own on other coins that went up.
The New York Times explains that “Losses can be used to offset capital gains, subject to certain rules, and losses that are not used to offset gains can be deducted — up to $3,000 — from other kinds of income”.
Do you have a story to tell or an opinion about taxes related to cryptocurrencies? Feel free to post it in the comments below.