It’s no secret that for our brothers and sisters in the USA, tax time is slowly approaching.
In this episode of CRYPTO 101 Matthew sat down with Mario Costanz — a lifelong entrepreneur who has spent the last 17 years specialising in income tax. The pointy end of all this experience has resulted in cryptotaxprep.com — an all-inclusive service designed to help the average consumer to file their crypto holdings, trades and sales for tax purposes.
Mario Costanz
Many of the ins and outs of basic crypto tax knowledge were covered in a previous episode of CRYPTO 101 with Mario here. However, in this episode we not only cover those old points, Mario and Matthew covered new points that will be of use to anyone who is filing their tax documentation this season.
Recent Changes
“Not much has changed as it pertains specifically to crypto. There was tax reform law passed that started effective January 1 2018 that changed a number of things. It just about doubled the standard deduction, it created a new 199A deduction for small businesses. It’s a gigantic set of changes that pretty much affects every single taxpayer. Pertaining to crypto, it doesn't necessarily change anything.”
How to Calculate a Loss?
For most of us, our portfolios have taken a hit this year. So how do we properly claim a crypto tax loss? The first thing to note is that if you haven't sold or traded for a loss then your portfolio loss is not an official tax loss.
However, if you have traded or sold then you may have logged a net loss for the financial year. This loss can then be deducted from your taxable income. For example, if you bought $1000 worth of Bitcoin and then later sold it all for $500, you have a $500 net loss. If your taxable income for the year was $40 000 you can deduct the loss from this amount so that now your taxable income is $39 500.
Using Wash Sales
A wash sale is when an investor sells their investment for a loss and then almost immediately buys back that same investment or something very similar. This way they can log a net loss and claim the tax benefits while still holding on to their asset into the new year. The IRS has regulations around this and it is worth familiarising yourself with them. However none are specific to crypto assets yet. This doesn’t mean they may not be applied to them though. Be careful.
FIFO or LIFO?
In calculating gains or losses with crypto or any capital asset, you need to pick whether you are going to play by FIFO (First in First out) or LIFO (Last in Last out). This difference simply just refers to how you want to categorise your assets. If you bought .25 BTC at $500 per BTC and then another .25 at $1000 BTC you now have .5 BTC and have spent $375. If you decide to sell .25 BTC when the price is $1500 per BTC which .25 are you selling? The one you bought first, or the one you bought later? Basically you have to make a decision and keep it consistent across all your trades and claims.
Reconciliation Tools
These are tools that essentially collect the data into one place and order it in such a way to make it ready to be used in a tax return. They are a great idea to be using all year round to make this time of year less of a headache.
What if I Traded A LOT?
The best thing you can do if you have made plenty of trades and have dabbled in multiple crypto assets is pay for a professional like Mario and his team at cryptotaxprep.com to help you sort through your tax claim. Be sure to use our affiliate code: CRYPTO 101 for a healthy discount. Tax evasion and fraud are serious offences and unfortunately pleading ignorant or forgetful won’t get you far.
Mario and his team have also established a service for CPAs and accountants to who are wanting to become familiar with crypto tax legislation and application over at cryptotaxacademy Check it out and be sure to listen to the podcast!
Written by: Glen Veitch - CRYPTO 101 Blog Writer