Crypto news

Daily dosage of Cryptocurrency news

Cryptocurrency and Taxes: What You Need to Know

Cryptocurrency is digital currency, or a “digital representation of value,” as the IRS puts it. You can’t see it, hold it in your hand, or put it in your wallet. It’s been in use for over a decade and has grown in popularity over the last few years. Instead of using a bank to create,…
Cryptocurrency and Taxes: What You Need to Know

Cryptocurrency is digital currency, or a “digital
representation of value,” as the IRS puts it. You can’t see it, hold it in
your hand, or put it in your wallet. It’s been in use for over a decade and has grown in popularity over the last few years. Instead of using a bank to
create, transfer, and exchange funds, cryptocurrency employs a distributed,
encrypted blockchain network to process transactions. No bank or government
authority controls it as they do with traditional currencies. So, if you have used cryptocurrency this year, what are the implications for when you file your taxes?

A Cryptocurrency Primer

First of all, let’s make sure we’re all on the same page when it comes to this new kind of money. Cryptocurrency units are referred to as coins, even though
there’s no physical coin.
You store coins in a digital wallet
or use an exchange or brokerage. Major providers of these include Coinbase,
Kraken, Binance, and Jaxx. Bitcoin was the first cryptocurrency
and it remains the most popular, though it’s been joined by Ethereum and Litecoin,
among others. Cryptocurrency can be used to pay for goods or services, to invest,
or simply to exchange funds with someone else. The coins can also be exchanged for traditional
currency. You can find real-time exchange prices for Bitcoin here. Cryptocurrency transactions are recorded in an anonymized blockchain, which can be
thought of as a digitized public ledger.

This form of money is still in its infancy, so don’t expect
to use it for online shopping, though some vendors have started accepting it. It’s
fairly popular among online gambling sites, and you could even buy
a Lamborghini
 with it. Some employers, too, have started paying
employees with it; the dollar
value of the cryptocurrency at the time of the transaction is treated as
W-2 or 1099 income. The mechanics of using cryptocurrency are often as simple as scanning a QR
code or copy and pasting a long ID, but what happens in the background is far
more involved than your typical bank transaction, since the transaction has to
be verified by lots of distributed servers, rather than one bank or exchange.

Cryptocurrency as

If you’ve been using cryptocurrency, but not paying taxes on
its related transactions, you’re not alone. You’re also not compliant with IRS
regulations, which could catch up with you someday. The agency may penalize you
unless you can prove “reasonable cause.”

Since 2014, the IRS has considered cryptocurrency to be
property. Taxpayers are required to report transactions involving virtual
currency as US dollars on their tax returns, which means they must determine its
fair market value as of the transaction date. You can determine fair market
value by converting the virtual currency into US dollars or into another
currency that can then be converted into US dollars (this is assuming the
currency’s exchange rate is established by market supply and demand).

Obviously, you need to do some seriously precise
bookkeeping if you’re planning to use cryptocurrency. There are several
accounting solutions designed for this, but QuickBooks may work just fine for
you (with some workarounds). You should start keeping detailed records from the
start, since reconstructing years of transactions could be difficult, or even

Does this mean you could be on the hook for transactions
going back to 2014? Yes. In fact, the IRS
sent letters last year to taxpayers who’d been involved in
cryptocurrency transactions, informing them that they had to file amended
returns and pay back taxes. It’s also released a new form for the 2019 tax year.
The Schedule 1 now includes the following phrase above Part I: Additional
Income: “At any time during 2019, did you receive, sell, send, exchange, or
otherwise acquire any financial interest in any virtual currency?”

Capital Assets and Cryptocurrency

If you sell your home because you’re moving or some stocks
because you want to take your profit, these properties are considered capital
assets. It’s similar for virtual currencies. You pay capital gains taxes on them—either
short (held less than a year, and taxed as normal income) or long term—on your
Schedule D. These are calculated just like other capital gains and losses: You take
your cost basis (the amount you paid for the currency) and calculate how much
it’s gone up or down since that date. Capital gains rates for the 2019 tax year
can be 0, 15, or 20 percent, depending on your taxable income.

If you’re selling property as a part of a business or trade,
however, the property is not considered a capital asset and is taxed as
ordinary income. This applies to virtual currency sales, too. The IRS looks at
the “character” of the gain or loss—your intent, or why you’re selling.

Cryptocurrency and

TurboTax is the only tax preparation website that walks you
through the process of recording a cryptocurrency sale. It does so thoroughly
and with lots of guidance. This tax topic is not included in the Deluxe version,
though. You’ll have to spring for Premier or Self-Employed.

You can find the cryptocurrency mini-wizard under Investment
Income. There are four situations that would require you to complete this
section. You’d do so if you:

  • Sold cryptocurrency
  • Converted cryptocurrency to a conventional
    currency like US dollars
  • Exchanged one of the various types of
    cryptocurrency for another one
  • Used cryptocurrency to purchase products or

Cryptocurrency transactions are sometimes reported on Form
1099-B, Form 1099-K, or a tax statement that your exchange sent to you. Exchanges
are not required to send these forms out, so don’t be surprised if you don’t
have one from 2019. It’s your responsibility to keep track of your transactions.
You can do so by downloading your order or trading history from your exchange’s
website as a CSV file. If you’re a frequent trader, you should be doing this at
periodic intervals throughout the year, since your exchange may limit you to
three months of data, for example. You’ll also be able to enter the data

TurboTax allows you to download CSV files from eight
cryptocurrency services: Coinbase, Bitcoin.Tax, BitTaxer, CoinTracker, CryptoTrader.Tax,
Robinhood, TokenTax, and ZenLedger. You can either drag and drop your files or
browse your system for them.

When you enter your data manually. TurboTax needs the
service name, asset name (like Bitcoin or Ethereum), purchase date, cost basis,
sale date, and sale proceeds. You may have to contact your exchange if your CSV
files’ labels don’t match those in TurboTax exactly. The site provides the
fields you’ll need to complete for each transaction on one screen.

After you enter this data and click Continue, a summary of the
transaction will appear. You can either add more transactions or continue with the return if
you’re finished. A final summary tells you whether it was a short-term or
long-term gain or loss, and if the transaction will be reported on your tax return.

Professional Help

If 2019 was the first year you experienced cryptocurrency
“taxable events,” you may be able to report all of your activity using
TurboTax. The IRS considers taxable events as:

  • Converting virtual currency to a currency like
    US dollars
  • Trading cryptocurrency with another
  • Purchasing goods and services with virtual
  • Receiving income in cryptocurrency

You can give virtual currency as a gift, transfer it between
wallets or exchanges, and purchase it with US dollars without creating a
taxable situation. But if you have numerous taxable events under your belt or
need to catch up from past years, you may need to consult a professional,
preferably a CPA who specializes in virtual currency tax issues.

Further Reading

Cryptocurrency Reviews

Cryptocurrency Best Picks

Leave a Reply

Your email address will not be published. Required fields are marked *