Do you have a significant amount of cryptocurrency transactions and don’t know where to start with U.S. tax reporting? The discussion below lays the groundwork for a series of content I will be posting pertaining to U.S. taxation of cryptocurrency. In my previous post, I introduced myself to the platform on a personal basis. This is the opportunity to get the general exposition out of the way for the series, and build the use case, so that the next article can be to the point on the topic, leaving more room for some practical examples.
Taxes of Today:
In the United States, many citizens generally don’t have the resources (or time) understand the tax law, even though taxes is one of their largest expenditures; all because the government has made it so unrealistically complex. The tax code and its guidance spans tens of thousands of pages, for which only accounting firms and paid research services can find answers in an organized manner. Luckily for the average U.S. citizen, the IRS’s strict requirements on companies (such as employers, banks, etc.) compels them to report personal taxable income directly to each individual who is impacted. Each February after the close of a calendar year, U.S. citizens can expect to receive various sets of forms in the U.S. mail - a Form W-2 from an employer, a Form 1099 for freelance work, a Form 1098 for a mortgage, etc. This documentation has been designed by the IRS to help the average citizen self-report. In fact, if you are an employee, your employer even holds back your taxes and pays it to the IRS for you, so you don’t have to cut checks on your own. Of course, it is not this simple for business owners and the 1%, but that’s a story for another time.
This means, the average U.S. citizen with a 9-5 job and a few investments is delivered in a ribbon/bow most of the information needed to file and (hopefully) obtain a refund every April 15th. Specifically for U.S. investors in in stocks, bonds and other securities, they can expect to receive a Form 1099 in the winter from their broker, which outlines the reportable transactions, including:
- Buying and selling securities - net proceeds and cost basis (to be explained in the very next article)
- Dividends and interest
- Other fees not included in basis, foreign tax credits, other items. In fact, the consolidated Form 1099 that brokers provide to investors is a combination of multiple separately imposed information return requirements (Form 1099-B, Form 1099-INT/OID, Form 1099-DIV, and more).
In some cases, investments are treated as partnerships and thus instead of a Form 1099, a Form K-1 will be received directly from the investment entity.
Taxes of Tomorrow: A U.S. citizen involved in significant crypto transactions should start thinking about a proactive tax compliance cycle. We might not receive the Form 1099 for crypto transactions that we depended on for our conventional investments. This doesn’t mean there is no tax obligation to the IRS, there is definitely a tax obligation on income from any source in the U.S. unless excluded by law, according to the IRS and Congress (Sec. 61). We can debate the fairness of income tax imposition in the U.S. on crypto, however that won’t stop the IRS from enforcement, so I am approaching this series based on what the IRS can and will enforce – the Internal Revenue Code. Some exchanges would like to be helpful.
For example, Coinbase designed a basis schedule with some of the information needed to help with filing U.S. taxes (although they disclaim they are not providing advice), and while it is not a Form 1099 it can be very helpful; see link below:
https://support.coinbase.com/customer/portal/articles/1496488-how-do-i-report-taxes-
What is one to do when trading Cryptos on other exchanges that are not providing such help, however? Or dealing directly with individuals on buy/sell websites? Or for a complex situation: paying USD for BTC, eventually transferring BTC to another exchange and exchanging with ETH or other crypto assets; selling and reinvesting, spending some on mining equipment to mine currency, and putting some back in another wallet, etc? Each individual step could end up in different sections of the U.S. income tax return! The reality is the United States income tax law is complex enough already, and cryptocurrency breaks the wheel. If you have a large volume of transactions in Crypto, unless you are paying a personal accountant for the extra time to figure this out, it will be a struggle. It may be challenging to find the full service at a commercial tax preparation to help you figure out your crypto gains (without additional fees). It could be years before the property reporting mechanisms are negotiated with crypto exchanges.
What are we to do?
My goal is to help people think about how crypto impacts their financial situation in the tax realm. Many on this site are covering the “pre-tax” financial gain perspective, and that is great and informative, so I am interested in hearing your thought on how this could fit in. Below is a general outline for some future article ideas. Part 1 is a WIP.
- ·Tentative Part 1 – General Tax Consequences of Holding Crypto for Investment under U.S. tax law (part 1 examination of Notice 2014-21)
- ·Tentative Part 1b – General Tax Consequences of Performing Services for Crypto in Exchange under U.S. tax law (part 2 examination of Notice 2014-21 and Sec. 83)
- Tentative Part 2 – Tax Consequence if you held and received Bitcoin cash during hard fork
- Tentative Part 3 - Receiving Cryptocurrency from your personal Mining
- Tentative Part 4 - Tax Implications from some complex instruments, such as Cloud Mining or MLM instruments (including tax write-off from Ponzi schemes)?
- Tentative Part 5 - Holding more than $10,000 USD of Bitcoin or other cryptocurrencies overseas? - reporting requirements to the Financial Crimes Enforcement Network reporting rules.
- Tentative Part 6 – the Coinbase IRS case.
- Tentative part 7 - Tax Implications of the first dividend in cryptocurrency from First Bitcoin Capital Corp.
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