Crypto Tax: An Introduction
As a serial entrepreneur – from pizzas to real estate – I know what entrepreneurs go through on the long journey from starting up a small business to becoming a runaway success. How do we do it? By staying on the cutting edge of innovation and one step ahead of the crowd.
I’m doing just that with my new venture, CryptoTaxPrep.com – a growing business specializing in crypto tax and accounting services. However, my true passion is helping and mentoring entrepreneurs who are still on their grind, hustling hard for that big break.
This is why Crypto Briefing invited me to comment on an increasingly important issue in the community: crypto tax as a leading tax professional. (See editor’s note below.)
You Must Report Your Cryptocurrency Gains to the IRS
Success in life is never guaranteed. Unfortunately, however, taxes almost always are. Coin miners and traders were riding high last year, and many people made a small fortune in cryptocurrencies in a matter of months. Now that tax season is here, however, it’s time to pay the piper for your virtual currency capital gains.
Whether you’re driving for Uber or day-trading cryptocurrencies, pretty much all side income is taxable. Regardless, lots of side-hustlers – especially younger people – don’t declare this additional income to the IRS and the capital gains are an issue. About one-third of millennials don’t report their side income to on their tax returns, a greater portion than any other demographic. And many of them do so because it seems like everyone else is doing it – which is not a particularly smart thing to do.
Evading taxes is tempting, sure, especially with virtual currency. Nobody likes paying their taxes. But failing to do so can land you in serious hot water with the IRS. This is especially true for cryptocurrency investors, who have already caught the attention of the tax agency. Last year, the IRS sued Coinbase seeking information on all active users on the exchange in an effort to collect back taxes. Why? Because the revenue department knows that there is massive under-reporting going on when it comes to capital gains tax on virtual currency.
Despite the fact that Coinbase alone has millions of active users, the agency only received about 800 return reporting crypto gains or losses in 2015. The IRS got a court order for identifying information on over 14,000 of the most active Coinbase users between 2013 and 2015 just before Thanksgiving last year, and these unfortunate individuals can expect a serious audit letter along with penalties, interest and most probably fines; pretty much any day now, as well as the original capital gains tax. So, unless you want to join them, I suggest you start figuring out how to pay your crypto taxes ASAP.
What Crypto Transactions Are Taxable? (Basically All of Them)
The IRS treats cryptocurrencies as capital assets just like stocks, bonds, and other types of valuable property. Buying bitcoin or any other virtual currency is not a taxable event in and of itself. Instead, the IRS taxes cryptocurrencies when they are sold, traded, or spent. Exactly how much you have to pay in crypto taxes varies based on several criteria, including how much other income you made that year and how long you held the asset. Any dispensation of your cryptocurrency is a taxable event – including retail purchases and it mainly comes down to your capital gains.
Now that cryptocurrencies are creeping into the financial mainstream, an increasing number of retailers are accepting cryptocurrency payments. Overstock.com started accepting bitcoins in early 2014, and customers can now use a number of virtual currencies to buy their goods, including Ether, Litecoin, Dash, Monero, and Bitcoin Cash. Cryptocurrency could boost their profits, but they better have a solid tax professional on board to oversee the avalanche of compliance and paperwork that will come with it.
While Overstock was first out of the gate, it’s certainly not alone. Expedia, Redditt, NewEgg.com, and Microsoft’s Xbox and Windows stores have also given customers the option to check out using bitcoin. Brick-and-mortar retailers are slowly joining their online compatriots, with Subway and Virgin Galactic paving the way.
But does that mean every time you buy a $5 Footlong sub in BTC you have to report it to the IRS? Well, for the time being, yes it does.
Like For Like Does Not Apply To Cryptocurrency
Many investors once believed that exchanging one cryptocurrency for another qualifies as a like-kind exchange exempted from taxation under Section 1031 of the Internal Revenue Code. However, when it comes to crypto taxes, this is not the case. Exchanging your Bitcoin for Ripple or swapping your Ether for Bitcoin Cash is a taxable event just like cashing out or making retail purchases. If there is a capital gain, then you have to pay capital gains tax.
So, if you jumped on the crypto craze last year, be sure to plan your cryptocurrency taxes with a qualified accountant this tax season. A certified tax professional with specific cryptocurrency tax experience could be the best investment you make all year.
Doing so will help you avoid unnecessary tax liability in the future and keep you on good terms with the IRS.
Crypto Briefing Editor’s Note: We are dedicated to helping our readers find useful resources to navigate the crypto world. This post was not paid or sponsored in any way, and we have not used, and cannot comment upon, the services referenced herein: we simply feel that given the scarcity of tax professionals who deal with crypto, it is worth bringing Mr. Costanz’s business to your attention, particularly if you are a resident or citizen of the USA.
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