(Image from IRS.gov)
For most individuals, the last thing on our mind as we navigate the cryptocurrency world is "how much of this do I owe to Uncle Sam?" Additionally, some of you out there may even see Bitcoin and it's friends as a means to evade paying taxes on income or capital gains.
As your friendly Steem CPA, I'm here to tell you that thinking about these matters should be top of your mind. In order for cryptocurrency's to move in to the mainstream, it is important that we act like these are real stores of value that we are transacting in (even if our government occasionally gives us mixed messages!). To help you navigate this space, I wanted to provide some basics regarding how the IRS has stipulated we consider our crypto assets:
- Cryptocurrencys are NOT considered a "currency instrument" by your federal tax authority
- Rather, Cryptocurrencys are a "property" for federal tax reporting:
- If you receive Cryptocurrency for performing a service, it is taxed the same as you would for receiving cash. That is, whether you get $100 in cash for washing someones car, or $100 in Bitcoin, it is taxed as ordinary income in both scenarios
- If you purchase a cryptocurrency is where things get interesting. Since it is considered property, you do not have to abide by the FMV rules used for valuing "actual" currencies at year end
- However, you are required to report capital gains on your Schedule D of the 1040 (similar to what you would do for disposition of stocks or other property)
- Capital gains can generally be calculated by: (Value @ Disposition) - (Value @ Purchase (Cost Basis))
- Anyone who has faced capital gains before knows it is important to understand Long-term capital gains vs. Short-term. Generally, STCG become LTCG if you held the property for >1 year
- The tax benefit for holding on to a crypto to get LTCG will depend on your tax bracket, but generally the LTCG tax rate is much lower than that on STCG (taxed as ordinary income)
So, now that you know all the basics, you probably don't even know where to start calculating your ordinary income, STCG, or LTCG! I will provide some tips here, but understand that every situation is unique (and I have no doubt only captured a small fraction of them here):
- Check your exchanges to see how robust their reporting of historical transactions is. If they don't provide much documentation then you may want to think about using a different service
- It is very important to know the date on which you purchased your cryptocurrency (as mentioned, you want to avoid STCG wherever possible). I've found it's helpful to just make a simple spreadsheet with the date and amount of purchase, which I'll be able to use should I not be able to get that data from the exchange when tax time comes around
- Realize that the more you buy/sell cryptocurrency's, the more potential impact there will be on your tax preparations. I am not advocating any trading strategy here, but consider what impact your strategy has on what your taxes will be
- Identify a good source of historical price data for the currency's you hold. If you don't notate the price when you receive/purchase the currency, you may need to look this information up when tax time comes
- Most importantly, talk to your lawmakers and tell them that a more clear basis for cryptocurrency tax reporting needs to be defined in the law! In some ways (tax being one of them), having more regulation in this space will increase the adoption of cryptocurrency's and make all holders better off. If we can partner with our lawmakers to come to a good solution we can all benefit
Please let me know if this advice is useful, and if there are specific situations that you would like me to speak on. I appreciate any and all upvotes and follows
Disclaimer: although I am a registered CPA in the state of California, any thoughts above are merely my understanding of the US tax code and should not be considered tax advise. Further, I am not a Certified Tax Professional or Tax Preparer, and all matters related to filing of your taxes should only be done after consulting with the appropriate professional accountant, lawyer, or other party.