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The Definitive Guide for
Cryptocurrency Taxation


Tax Guide
  • A Word on Cryptocurrencies

    The bulk of cryptocurrencies like Bitcoin and other altcoins had their coming out party in 2017. With all the excitement and opportunities around these virtual coins, it might be easy to forget about crypto taxation. Just about every virtual currency transaction; from mining and spending to trading and exchanging, will be a taxable event for U.S. tax purposes. According to Uncle Sam, Bitcoin and other cryptos are classified as property. That means whenever you buy something with crypto, it’s not one transaction but two. What you are actually doing is selling property for a cash value and then using money from that sale to purchase a product. So, every purchase you make with cryptocurrency, such as Bitcoin or a Bitcoin alternative, has to be reported in your taxes.

    With cryptocurrencies’ value constantly changing, keeping track of all that data could be a nightmare come tax time. But let’s say you are holding on to cryptocurrencies as an investment. You’ve watched the value grow and now want to cash out. If you held those cryptocurrencies for less than a year, you will be taxed at short-term income rates. If you’ve held for over a year, you will be taxed at long-term income rates.

    According to the 2018 Tax Cuts and Jobs Act that was recently passed, short-term and long-term capital gains taxes are going to be applied as follows:

    Long-Term Capital Gains Rate

    Long-Term Capital Gains Rate
    Single Taxpayers
    Married Filing Jointly
    Head of Household
    Married Filing Separately
    0% Up to $38,600 Up to $77,200 Up to $51,700 Up to $38,600
    15% $38,601 to $425,800 $77,201 to $479,000 $51,701 to $452,400 $38,601 to $239,500
    20% Over $425,800 Over $479,000 Over $452,400 Over $239,500

    Short-Term Capital Gains Rate

    Long-Term Capital Gains Rate
    Single Taxpayers
    Married Filing Jointly
    Head of Household
    Married Filing Separately
    10% $0 to $38,700 $0 to $19,050 $0 to $13,600 $0 to $9,525
    12% $9,525 to $38,700 $19,050 to $77,400 $13,600 to $51,800 $9,525 to $38,700
    22% $38,700 to $82,500 $77,400 to $165,000 $51,800 to $82,500 $38,700 to $82,500
    24% $82,500 to $157,500 $165,000 to $315,000 $82,500 to $157,500 $82,500 to $157,500
    32% $157,500 to $200,000 $315,000 to $400,000 $157,500 to $200,000 $157,500 to $200,000
    35% $200,000 to $500,000 $400,000 to $600,000 $200,000 to $500,000 $200,000 to $500,000
    37% Over $500,000 Over $600,000 Over $500,000 Over $500,000

    However, here’s the problem: almost no one does it. From 2013 to 2015, less than 900 people each year reported Bitcoin transactions to the IRS. That’s out of millions just counting the number of users on crypto exchange Coinbase alone. This prompted the IRS to label cryptocurrency as property, back in 2014, and to recently service summons to Coinbase. They called for the records of over 14,000 users who have bought, sold, sent or received at least 20,000 dollars’ worth of Bitcoin in the given year.

    Moving forward, there may be some relief. A bipartisan bill, the Cryptocurrency Tax Fairness Act, was presented to Congress in September 2017. It’s seeking to create a tax exemption for cryptocurrency transactions under 600 dollars. So, there is some hope for amnesty but with the price of some of these cryptocurrencies skyrocketing, Uncle Sam still looks poised to get a decent cut of the action.

    The Evolution of Cryptocurrencies as an Asset Class

    The Evolution of Cryptocurrencies as an Asset Class When we look back on the history and emergence of cryptocurrencies, 2017 will be the year that things truly took off. The total market cap of all cryptocurrencies began the year just shy of 18 billion USD and by the end of the year the total market cap stood at around $245 billion, with Bitcoin owning about 50 percent of the market share and the next closest competitor, Ethereum, at almost 14 percent. Now, as the public interest on cryptocurrencies continues to grow, the lingering question remains: Is cryptocurrency money, a security or is it an asset?

    While crypto currencies fulfill all the conditions to be classified as money, there is one factor holding them back; volatility. It’s hard for a merchant to accept $75 USD in Bitcoin for a pair of shoes only to see the price fall to $20 USD. Who in their right mind wants to spend even a dollar in cryptocurrency on cheap cup of coffee, when that same dollar might be worth ten, twenty, or fifty times as much within just a decade?

    Reasons Why Cryptocurrencies Represent a New Asset Class

    1. Their Politico-Economic Profile

    What gives cryptocurrencies value is the fact that they can facilitate all kinds of transactions, starting with the most basic one of enabling money in the form of bitcoin or other alt coins, to be sent across the world near immediately, securely, transparently, and at almost no cost. Most of them are governed by protocols run by a distribution of computer networks unlike the fiat currencies which are controlled by government monetary policy.

    2. Their Invest-ability

    The collective daily trading volume for digital currencies by the second quarter of 2016 stood at more than 2 billion dollars. Bitcoin exchange trading volume alone averaged around 1 billion dollars a day through the first quarter of 2016 with roughly the same liquidity as the largest gold ETF (GLD) and three times that of Vanguard’s REIT ETF (VNQ). All this is despite the fact that GLD and VNQ store significantly more in assets than Bitcoin.

    Cryptos are expected to become even more liquid with time thanks to its accessibility around the world. Some analysts believe that more people will be inclined to hold more cryptocurrencies than equities of a publicly traded company.

    3. Risk-Reward Profiles

    Cryptocurrencies have proven to have quit attractive risk-reward profiles as seen by their Sharpe Ratios. In simple terms, Sharpe Ratios measure the amount of returns from a given asset per unit of risk taken. For the last three to four years, Bitcoin currency has shown to have a superior Sharpe Ratios compared to all other asset classes.

    The mindset of crypto users is deeply entrenched as an asset. People are pumping money into these virtual currencies in the expectation of greater returns. They expect their investment to continue to rise in value as it has for the past few years. While most investors of Bitcoin are excited about the future of altcoins and the shift from traditional banking conglomerates, the overwhelming appeal is in the prospect of profit to be gained.

    Tax Implications for Cryptocurrencies

    Various cryptocurrency transactions have different tax implications. Let’s briefly examine some of them.

    Spending Cryptocurrencies

    This is a tax event and may generate capital gains or losses, which can be short-term or long-term. For example, say you bought one coin for 50 dollars. If that coin was then worth 120 dollars and you bought a 120-dollar gift card, there is a 70 dollar taxable gain. Depending on the holding period, it could be a short- or long-term capital gain subject to different rates.

    Trading Cryptocurrencies

    Trading cryptocurrency produces capital gains or losses, with the latter being able to offset gains and reduce ta

    Receiving Payments in Cryptocurrency

    Receiving cryptocurrency, in exchange for products or services or as salary is treated as ordinary income at the fair market value of the coin at the time of receipt.

    That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain which is taxable.

    Exchanging One Type of Cryptocurrency for Another

    A good example is using Ethereum cryptocurrency (ETH) to purchase an altcoin such as Litecoin cryptocurrency (LTC). This creates a taxable event. The ETH is treated as being sold, thus generating capital gains or losses based on the FMV and cost basis of the ETH when you liquidate it to purchase LTC.

    Converting a cryptocurrency

    Conversion of a cryptocurrency to U.S. dollars or another currency at a gain is a taxable event. This is because it is treated as being sold, thus generating capital gains.

    Airdrops

    These are considered ordinary income on the day of the air drop. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain which is taxable.

    The American Bar Association (ABA) Section of Taxation has formally asked the US Internal Revenue Service (IRS) to create a safe harbor for investment gains realized from cryptocurrency hard forks. We are watching developments here closely.

    Mining coins

    The mining of coins is considered ordinary income and is equal to the fair market value of the coin the day it was successfully mined. That value will become the basis of the coin. When it’s sold, exchanged, etc., there will be a capital gain which is taxable.

  • Internal Revenue Service (IRS)

    The Internal Revenue Service or IRS is the US federal agency tasked with collection of tax revenue for the federal government. It has the entire force and power of the United States behind it, and pretty much every citizen has to deal with it at least once a year in one way or another. It's the entity that's behind all those deductions in your pay and those quarterly estimated tax payments you make if you're self-employed. That's just a quick summary of what IRS is and what it does. So, how is the IRS involved with cryptocurrencies?

    As of March 2018, the IRS still treats cryptocurrencies as property. Simply holding cryptocurrency, whether it has gained value or lost value, does not mean that you owe taxes. In order to owe taxes, you would have to sell cryptocurrency, trade for another cryptocurrency, or purchase something with it. These are known as taxable events. Just like the ones we discussed in the previous chapter.

    In the years 2017, the 10 best performing cryptocurrencies posted average price gains of more than 14,000 percent compared to the 20 percent returns posted by the stock markets. Despite this increased wealth, the bulk of cryptocurrency traders fail to report their cryptocurrency trading to the IRS.

    According to one leading filing service firm, less than 100 of the more than 250,000 (or 0.04 percent) clients whose taxation filing they did reported any cryptocurrency transactions. While the figures of those reporting to the IRS remain extremely low, they are not surprising at all. This is because one of the top reasons why investors dabble in cryptocurrencies is so that they can avoid government regulations and intrusions. So you wouldn’t expect most cryptocurrency investors to be that forthcoming with filing of returns.

    However, recent developments involving the IRS have only showed that there will be significant scrutiny for crypto investors who are under-reporting cryptocurrency income and/or gains.

    U.S. Securities and Exchange Commission (SEC)

    The Securities and Exchange Commission works to oversee corporate takeovers and to protect investors in the United States. Established by the U.S. government, SEC requires that publicly traded companies disclose their financial information to the general public. The commission also requires investment advisers to specify the volume of managed assets and the services offered. While its primary role and mission remains to protect investors and maintain a fairly and orderly market, its functions can be broken down as follows.

    a. Creating Fair Markets

    Through a special division, the SEC oversees all market participants such as: clearing agencies, exchanges, security firms and credit rating agencies; with a view to providing a daily overview of market activities. The commission also helps establish new rules and policies by examining and interpreting matters that affect operations within the securities markets.

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  • No shrewd upstanding digital currency investor wants to be scrutinized by the IRS. However, in the world of cryptocurrencies it is becoming more evident that this could be a real possibility. While the burden of the blame can be placed on those who fail to report cryptocurrency transaction since it is their duty, some of that burden has to be shouldered by the IRS. How so? Well, the last guidelines that the agency formally provided was way back in 2014. Now, this may seem like just a couple or so years ago but in the world of crypto-assets, a lot of developments occur in just a few months.

  • The following are some key points that you need to understand about digital currency and cryptocurrency taxes:

    • Trading crypto to crypto is a taxable event and thus needs to be recorded. Every transaction, whether crypto to crypto, crypto to fiat or crypto for goods and/or services needs to be recorded and appropriate taxes paid.
    • Cryptocurrency is treated as property for tax purposes. Whether you are holding, mining, investing or paying using crypto, you need to record this and appropriate taxation will be applied.
    • The rules about cryptocurrency and crypto taxes – especially ones involving like-kind exchanges are murky at best. If you had any substantial activity in the cryptocurrency space, consider hiring an accountant to help you square up with the IRS at tax time.
    • As is with other investment properties, the tax implications on cryptocurrencies can differ depending on how the property is treated ‘in the hands of the taxpayer’.
    • Capital gains count toward your total taxable income and affect your tax bracket.
    • Independent capital losses and capital gains in a year can be written off against each other.
  • Well, it is apparent that more clarity is needed from the IRS and hopefully, by the help of congress, the agency will be able to address the concerns raised by cryptocurrency trading. However, one thing remains unchanged; the responsibility of reporting cryptocurrency transactions and filing tax returns falls upon you. Cryptocurrency is a relatively new technology which looks like is here to stay. No doubt it is somewhat complex to the greater majority of people. Therefore, make sure you keep a record of all transactions involving cryptocurrency and when tax season comes, enlist the services of a professional CPA to help you do your reporting and make sure you are not breaking any laws. Paying taxes is not something that most people look forward to but remember losing a lot more money due to fines or doing time in a federal prison is a lot worse.

    Here at Camuso CPA, we offer cryptocurrency tax services in Charlotte to clients across the country. Digital currencies are an exciting new currency medium that is fast gaining popularity. However, as a new monetary medium, there is a lot of grey area come tax season. The last thing any good investor wants is to be scrutinized by the IRS, and that is fast becoming a real possibility as cryptocurrencies become more mainstream.

    Interested in learning more about cryptocurrencies, taxes — such as Bitcoin taxes — and more? Sign up to receive our ebook download for free today!

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